The terms ‘short run’ and ‘long run’ are referred to as time concepts and not periods in macroeconomics.
The major difference between these two terms lies in the fact of increase or decrease in the quantity of the inputs. These two time-based parameters are used in many disciplines and applications.
- Short run refers to a period where some factors of production are fixed while others are variable.
- The long run refers to a period where all factors of production are variable and can be adjusted.
- In the short run, a firm can adjust the output by changing variable inputs, while in the long run, a firm can change all inputs, including capital and labor.
Short Run vs Long Run
Short run is used to describe a period of time when some factors of production are fixed, while other factors can be varied. Long run means a period of time in which all factors of production can be adjusted. Long-run decisions tend to be more strategic and focused on investments in new technology.
In the short run, a firm can improve production by adding additional raw materials and labor, but not by building a new factory.
All inputs, including factory spaces, are fixed in the short run, implying that no variable factors or restraints inhibit growth in production output.
The factory input is flexible in the long run, which implies that current firms are not bound and can adjust the size and number of factories they own, whereas new firms can establish or buy factories to produce more.
To fulfill the rising demand, more companies will certainly enter the desired industry in the long run.
|Parameters of Comparison||Short Run||Long Run|
|Definition||We know the functional relationship between inputs and outputs of goods in a short period in the short run.||We know the functional relationship between inputs and outputs of goods in a long period in the long run.|
|Production Function||Variable proportion type of production function.||Fixed production type of production function.|
|Capital to labor (Ratio)||Shifts with the shifts in output.||Doesn’t shift with the shifts in output.|
|Production Scale||The production scale remains the same.||The production scale changes with the output.|
|Fixed and variable factors||Capital is fixed, and labor is variable.||All factors are variable.|
What is Short Run?
There are three stages of production in economics. Because of time constraints, at least one factor is fixed in short-run production processes.
Three instances of short-run production processes in various sectors will be described with an example. In a fashion retail store, the location of the store does not vary in the short term. Many elements, however, can transform in a short period.
For example, retail directors and shop managers can quickly adjust the number of sales associates on staff and hire or fire employees. The input of personnel will cause a higher marginal return and more sales for the store in the early stages.
In stage two, sales performance will continue to improve with each additional employee, but the marginal return will fall. Additional staff involvement will cause a negative marginal return in stage three.
The short run is the time when some variables are variable, and others are fixed, limiting entry or exit from the industry; it is also the time when these variables may not fully adjust.
Short-run costs are compiled concurrently throughout the manufacturing process. Fixed costs don’t affect the costs that occurred in the short-run costs, and only output affects the variable costs and revenues. Variable costs change in retort to production.
Examples of variable costs: are employee salary and raw material expenses, etc. Short-run costs rise or fall in response to variable costs and the rate of production.
If a firm can successfully manage its short-term expenses over time, it will be more likely to meet its long-term costs and objectives.
What is Long Run?
The long run is a conceptual concept in economics in which all economies have reached equilibrium, and all pricing and supply have completely harmonized.
The long-run distinctions from the short-run, in which there are restrictions and markets are not fully in balance. All the inputs related to the production cycle are variable.
As a result, relative costs and the substitutability of production elements influence input selection.
As a result, the long-run cost is the lowest cost of producing a particular output level after all production factors have been adjusted. Assume a company has a production function Q with labor (L) and capital (C) inputs.
i.e Q = f(L, C)
The firm’s dilemma now is how to choose in such a way that it must provide an output level.
Q* at the lowest possible cost.
TC = wL + RC (Total Cost)
This equation, known as the isocost line, depicts combinations of L and C that can be purchased at a price, with w and r denoting labor and capital costs, respectively.
The average cost per unit can decrease as the volume of production increases, remain constant regardless of the number of units produced, or increase as we need to buy expensive materials or import them at a higher cost in the long-run process.
Main Differences Between Short Run and Long Run
- Short-run costs have both fixed and variable factors, whereas long-run costs have no fixed components.
- In the short run, because of the condensed duration, the general price level, contractual salaries, and expectations do not always adjust. In the long run, the overall price level, earnings, and probabilities react to the state of the economy.
- Short-run costs determine a firm’s ability to accomplish its future production and financial goals. Long-term costs of a firm estimate the realistic future production and financial goals.
- Short-run in macroeconomics is concerned with fluctuations, whereas the long-run in macroeconomics is concerned with growth and long-run unemployment.
- Short-run studies and short-run policy intended to dampen business cycles. Long-run studies long-run policy intended to promote growth and long-run prosperity and reduce long-run unemployment.
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.