Analyzing Production Efficiency and Scale Economies: A Cobb-Douglas Model Application on TSMC

Abstract

This study will utilize the Cobb-Douglas production function to analyze the production efficiency and cost minimization problems of TSMC (Taiwan Semiconductor Manufacturing Company). By using linear regression to analyze the annual reports of TSMC from 2015 to 2023, the major goal of this report is to determine the total output (annual revenue) and to estimate the total factor productivity (A). The results shown indicate that the production process of TSMC is very consistent with the regular scale revenue estimation, and the elasticities of labor and capital, respectively, are 0.55 and 0.43. This shows the labor cost is slightly higher than the capital cost. Moreover, the estimation of total factor productivity (A) reflected that TSMC has high technological efficiency and is constantly improving its productivity. This study further discusses the results based on linear regression, how to improve resource allocation and promote productivity efficiency, and provides some recommendations, such as technological innovation, capital use efficiency improvement, green manufacturing, and global market layout. Lastly, this report provided beneficial references on effective production management for semiconductor industries and offered some useful insights for other technical industries.