Difference Between Short Run and Long Run

Edited by Diffzy | Updated on: October 07, 2022

       

Difference Between Short Run and Long Run Difference Between Short Run and Long Run

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Introduction

In macroeconomics, the term short-run and long-run refers to time concepts rather than periods. The main distinction between these two concepts is the number of inputs that are increased or decreased. Many fields and applications use these two time-based factors. Many an economics student has wondered about the distinction between the long and short runs. "How lengthy is the long run and how brief is the short run?" they ponder. This is not only an excellent question but also a vital one. In microeconomics, the distinction between the long run and the short run is examined.

Short-Run vs. Long Run

A short-run production function refers to the period during which additional equipment and machinery cannot be installed to boost output levels. The Long-run productivity, on either hand, is one in which the business seems to have enough time to assemble manufacturing equipment or capital investments rather than increasing the number of labor units. The production function can be defined as the operational relationship between inputs and outputs, in the sense that it is the greatest number of finished items that can be produced with the given factors of production, at a given level of technical competence. Short-run production functions and long-run production functions are the two types of production functions.

The key distinction between the short and long runs is that the short run is defined as a period during which at least one input is fixed while the amounts of the other inputs are changeable. The long run is a period in which all input quantities can be changed. A company can boost productivity in the short term by adding more raw materials and personnel but not by building a new factory. In the short run, all inputs, including factory space, are fixed, meaning that there are no changeable factors or limitations impeding manufacturing output increase.

In the long run, factory input is flexible, which means that existing firms are not constrained and can modify the size and number of factories they possess, whereas new firms can build or buy factories to increase production. In the long run, more companies will enter the desired industry to meet the expanding need.

Any one of the factors connected with production is fixed in the short-run scenario. Firms may alter the level of other factors required for production to increase output. The fixed factors of production are those that remain constant, while the changing factors are known as variable factors of production.

A company like ABC, which can make 10 cars per day and wants to create more while utilizing existing infrastructure owing to increased demand throughout the season, is an example of a short run.

The factors that affect production, as well as the expenses connected with them, are variable in the long run. During this time, a company gains decision-making flexibility. Furthermore, a company can anticipate increased rivalry in the long run.

 A good example of a lengthy run is the same firm, ABC, which is always striving to grow its automobile production capacity rather than only during the season. In addition to existing infrastructure, it necessitates the acquisition of new land, labor, and equipment.

Differences Between Short-Run and Long Run in Tabular Form

Table: Short-Run vs. Long Run
Parameters of Comparison
Short-Run
Long Run
Explanation
In the short run, we understand the functional link between goods inputs and outputs.
In the long run, we understand the functional link between inputs and outputs of goods.
Production
Production function with variable proportions.
The production function is fixed in nature.
Ratio
Shifts in response to changes in production.
Doesn't change in response to changes in output.
Scale
The scale of output stays unchanged.
The output determines the scale of production.
Fixed and Variable Value
Labor is a variable, while capital is set.
All variables are subject to change.

What is the Short Run?

The short-run production function is one in which at least one production factor is assumed to be fixed in supply, i.e., it cannot be increased or decreased, and the rest of the elements are variable. In general, the firm's capital inputs are assumed to be fixed, and the production level can be altered by altering the number of other inputs such as labor, raw materials, and capital. As a result, among all elements of production, changing capital equipment and increasing output produced is relatively tough.

The law of variable proportion, also known as the law of returns to variable input, governs what happens when extra units of a variable input are mixed with a fixed input. In the short run, growing returns are due to factor indivisibility and specialization, whereas decreasing returns are due to the perfect elasticity of factor replacement.

In economics, there are three stages of production. In short-run production processes, at least one element is fixed due to time restrictions. Three examples of short-run production processes in distinct industries will be discussed. The location of a fashion retail business does not change in the near term. Many elements, on the other hand, can change rapidly. For example, retail directors and shop managers can swiftly change the number of sales associates on staff and hire or fire people. In the early phases, staff input will result in a higher marginal return and more sales for the store.

With each extra employee, sales performance will improve in stage two, but the marginal return will decrease. In stage three, increased staff involvement will result in a negative marginal return. The short-run is the period during which some variables are variable and others are fixed, limiting entry and exit from the industry; it is also the period during which these variables may not fully adjust. During the production process, short-run costs are compiled in real-time. Fixed costs have no impact on short-run costs; only output has an impact on variable costs and revenues. In response to the production, variable costs change.

To Understand the Short Run

The short-run differs from the long-run in terms of limitation. Leases, contracts, and pay agreements limit a company's capacity to modify production or wages to maintain a net profit in the short term. There are no fixed costs in the long run; costs are balanced when a firm's outputs combine to provide the desired volume of things at the lowest possible cost.

If a hospital's demand is lower than predicted in a given year, but its whole workforce of doctors, nurses, and technicians is on a year-to-year contract, the hospital has little alternative but to accept a profit loss. Firms in capital-intensive industries, such as oil and mining, have time to expand or downsize factory operations or investments in response to shifting demand in the long run. However, they are unable to capitalize on fluctuations in demand with the same degree of flexibility in the short term.

Key Points

  • In business, the short-run asserts that one or more inputs will be fixed at some point in the future, while others will be changeable.
  • The short-run in economics refers to the idea that an economy's behavior will vary depending on how much time it has to absorb and respond to inputs.
  • The long-run is the antithesis of the short run, as it has no fixed expenses. Rather, costs are balanced with the required number of costs at the lowest possible price.

What is the Long Run?

The long-run is a period in which all production and cost elements are uncertain. Firms can alter all costs in the long run, but they can only influence pricing in the near term by making changes to output levels. Furthermore, while a company may have a monopoly in the short run, it may face competition in the long run.

The long-run production function describes the period during which all of the firm's inputs are changeable. Because the firm can vary and adjust all variables of production as well as the degree of output created according to the business environment, it may function at varying activity levels. As a result, the company can flip between two scales.

The law of returns to scale applies in this situation, and it addresses how output varies with changes in production level, i.e. the relationship between activity level and output amounts. Economies of scale cause growing returns to scale, while diseconomies of scale cause diminishing returns to scale.

It's an economic notion in which all economies have reached equilibrium and all prices and supplies have become perfectly synchronized. The long-run differs from the short run, which has constraints and markets that are not entirely balanced. All of the inputs to the manufacturing process are variable. As a result, input selection is influenced by relative costs and the substitutability of manufacturing items.

To Understand the Long Run

A long run is a period during which a manufacturer or producer can make manufacturing decisions with greater flexibility. Based on expected profits, businesses can either expand or shrink manufacturing capacity, or enter or depart a sector. Companies that aim in the long run realize that they can't change production levels to attain market forces equilibrium.

The long-run in macroeconomics refers to the time when the general price level, contractual wage rates, and expectations have fully adjusted to the current state of the economy. In contrast, in the near run, these variables may not adjust completely. Long-run models may also deviate from short-run equilibrium, in which supply and demand react more flexibly to price levels.

Firms can adjust output levels in response to predicted economic profits. For example, a company may implement change by raising (or decreasing) production size in response to profits (or losses), which may include the construction of a new plant or the addition of a manufacturing line. The short-run, on the other hand, is the time horizon across which production factors are fixed, except labor, which is changeable.

Main Differences Between Short-Run and Long Run in Points

  • The period during which the firm is unable to adjust the quantities of all inputs is known as the short-run production function. The long-run production function, on the other hand, denotes the period over which the firm can adjust the quantities of all inputs.
  • While the rule of variable proportion controls the short-run production value, the law of returns to scale controls the long-run factor of production.
  • In the short-run production function, activity levels do not fluctuate, however in the long-run production function, activity levels can increase or decrease.
  • Because one input varies while the others are fixed in nature, the factor ratio changes in a short-run run production function. In the long run, however, the factor proportion remains constant because all factor inputs vary in the same amount.
  • In the short run, there are obstacles to enterprises entering the market, and firms might close but not quit. In the long run, however, enterprises are free to enter and leave.
  • Short-run costs include both fixed and variable components, whereas long-run costs do not.
  • The general price level, contractual salaries, and expectations do not always change in the short run due to the condensed timeframe. The general price level, earnings, and probability all react to the state of the economy in the long run.
  • Short-run costs determine a company's capacity to meet its long-term production and financial objectives. A company's long-term costs evaluate its probable future output and financial objectives.
  • In macroeconomics, the short-run is concerned with fluctuations, whereas the long-run is concerned with growth and long-run unemployment.

Conclusion

Because their meanings differ, the notions of the short run and long run are so important in economics. In macroeconomics, this is also true. Rather than actual dates, they are time ideas. In the short run, the capital stock is fixed, but in the long run, it has adjusted to a new equilibrium level. Everything in between is a phase of transition. Instead of a succession of images, think of the economy's shift to something new as a film. A brief run, or a period measured in days rather than decades, is unpredictable, wild, and significant, just like a man.

To conclude, the production function is a mathematical representation of the relationship between technological input and output. A short run simply refers to a shorter period than a long run in any industrial function. As a result, the definitions of the long run and short run vary depending on the process, and the two time periods cannot be expressed in days, months, or years. Only by examining whether or not all of the inputs are variable can these be deduced.

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"Difference Between Short Run and Long Run." Diffzy.com, 2022. Fri. 09 Dec. 2022. <https://www.diffzy.com/article/difference-between-short-run-and-long-run-415>.



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