To Tell the Truth about Interpreting the Morishima Elasticity of Substitution

The Morishima Elasticity of Substitution (MES) is often used to measure the change in relative factors for a change in price. This paper develops a generalized factor ratio elasticity of substitution (FRES) that nests the MES as a special case. By comparing the FRES with the MES under cost minimization, output or utility maximization, and profit maximization, this paper shows the narrow conditions under which the MES can be correctly interpreted as a measure of the percentage change in relative factors for a percentage change in price. An empirical example demonstrates how misleading the MES can be for this purpose.