Short run versus long run

Short Run versus Long Run in Business Economics

Definition

• The short run in economics describes a period in which at least one input (usually capital) is fixed and can’t be adjusted, with changes in output only possible by changing other inputs (like labour).
• The long run refers to the period when all inputs, including capital, can be varied, leading to the firm adjusting its scale of operations.

Important Features of Short Run and Long Run

• Fixed and Variable Factors: In the short run, some factors of production are fixed (e.g. machines, plant size), whereas in the long run, all factors are variable and can be adjusted by firms.
• Law of Diminishing Returns: This applies to the short run when increasing one variable input (while other inputs are kept fixed) results in decreasing marginal returns.
• Economies and Diseconomies of Scale: These concepts apply to the long run, where increasing the scale of production can either lead to decreasing average costs (economies of scale) or increasing average costs (diseconomies of scale).

Implications in Decision Making

• Short run decisions might be about meeting an unexpected increase in demand, whereas long run decisions might involve expanding the business or investing in new technology.
• Firms must consider their short run costs and potential revenues when making production decisions, whereas long run decisions are typically based on expected growth, competition, and potential profitability in the market.

Examples of Short Run and Long Run

• A business hiring more staff to manage a busy period is a short-run decision. These staff can be let go when business slows down.
• Building a new factory or purchasing new machinery involves a long-run decision, as these are significant investments and aren’t easily reversible.

Importance of Short Run and Long Run

• Understanding the distinction between short run and long run helps firms plan their business strategies and make informed production and investment decisions.
• Policymakers also consider short run versus long run when implementing economic policies, acknowledging the trade-off between immediate effects and long-term sustainable growth.

In summary, the short run and long run in economics represent different timeframes that companies operate within and have distinct features and implications. Understanding these concepts can help firms to balance immediate needs with strategic, long-term goals.