Substitution of Factors in the Cost Function of the Chemical Industry

The chemical industry has one of the largest production value chains, and the products of these industries are widely used as intermediate goods in other industries. In this paper, as regards cost function, Allen's elasticities and own elasticities, price elasticities, Morishima elasticities, energy elasticity, and scales of economics have been estimated in seven selected activities of the chemical industry using statistics and information 2002(2)-2018(1). The results show that the average share of employment, wages, output, and energy of the chemical industry in the entire industrial sector are equal to 6.38, 8.41, 13.28, and 17.45% percentages, respectively (in the period under review). In manufacturing of fertilizers and nitrogen compounds, plastics and synthetic rubber in primary forms, man-made fibers, soap and detergents, cleaning and polishing preparations, perfumes, and also cosmetic preparations, changes in energy input prices affect production costs more in comparison with changes in the prices of other inputs. In all seven selected activities, capital stock demand is more sensitive to changes in its price than other input. In addition, the amount of cross-demand hedges are mostly small. In manufacturing of basic chemicals, fertilizers and nitrogen compounds, paints, varnishes, and similar coatings, printing ink, mastics, and man-made fibers, the price elasticity of natural gas is higher than other types of energy. In the manufacturing of other chemical products, soap and detergents, cleaning and polishing preparations, perfumes, and cosmetic preparations, and plastics and synthetic rubber in primary forms, the price elasticity of electricity is higher than other inputs. Furthermore, the selected activities in this study have increasing returns to scale, thus the larger units of which are preferable to the smaller units.