Long Run and Short Run

Long run and short run:
In macroeconomics, the long run is the conceptual time period in which there are no fixed
factors of production as to changing the output level by changing the capital stock or by entering
or leaving an industry. The long run contrasts with the short run, in which some factors are
variable and others are fixed, constraining entry or exit from an industry. In macroeconomics, the
long run is the period when the general price level, contractual wage rates, and expectations
adjust fully to the state of the economy, in contrast to the short run when these may not fully
adjust.[1]
In the long run, firms change production levels in response to (expected) economic profits or
losses, and the land, labor, capital goods and entrepreneurship vary to reach associated long-run
average cost. In the simplified case of plant capacity as the only fixed factor, a generic firm can
make these changes in the long run:
 enter an industry in response to (expected) profits

 leave an industry in response to losses
 increase its plant in response to profits
 decrease its plant in response to losses.
Long-run average-cost curve with economies of scale to Q2 and diseconomies of scale

thereafter.
The long run is associated with the long-run average cost (LRAC) curve in microeconomic
models along which a firm would minimize its average cost (cost per unit) for each respective
long-run quantity of output. Long-run marginal cost (LRMC) is the added cost of providing an
additional unit of service or commodity from changing capacity level to reach the lowest cost
associated with that extra output. LRMC equalling price is efficient as to resource allocation in
the long run. The concept of long-run cost is also used in determining whether the long-run
expected to induce the firm to remain in the industry or shut down production there. In long-run
equilibrium of an industry in which perfect competition prevails, the LRMC = Long run average
LRAC at the minimum LRAC and associated output. The shape of the long-run marginal and
average costs curves is determined by economies of scale.
The long run is a planning and implementation stage.[2][3] Here a firm may decide that it needs to
produce on a larger scale by building a new plant or adding a production line. The firm may
decide that new technology should be incorporated into its production process. The firm thus
considers all its long-run production options and selects the optimal combination of inputs and
technology for its long-run purposes.[4] The optimal combination of inputs is the least-cost
combination of inputs for desired level of output when all inputs are variable.[3] Once the
decisions are made and implemented and production begins, the firm is operating in the short run
with fixed and variable inputs.[3][5]
All production in real time occurs in the short run. The short run is the conceptual time period
in which at least one factor of production is fixed in amount and others are variable in amount.
Costs that are fixed, say from existing plant size, have no impact on a firm's short-run decisions,
since only variable costs and revenues affect short-run profits. Such fixed costs raise the
associated short-run average cost of an output level over the long-run average cost if the amount
of the fixed factor is better suited for a different output level. In the short run, a firm can raise
output by increasing the amount of the variable factor(s), say labor through overtime.
A generic firm already producing in an industry can make three changes in the short run as a
response to reach a posited equilibrium:
 increase production
 decrease production
 shut down.
In the short run, a profit-maximizing firm will:
 increase production if marginal cost is less than marginal revenue (added revenue per
additional unit of output;
 decrease production if marginal cost is greater than marginal revenue;
 continue producing if average variable cost is less than price per unit, even if average total
cost is greater than price;
 shut down if average variable cost is greater than price at each level of output.
The transition from the short run to the long run may be done by considering some short-run
equilibrium that is also a long-run equilibrium as to supply and demand, then comparing that
state against a new short-run and long-run equilibrium state from a change that disturbs
equilibrium, say in the sales-tax rate, tracing out the short-run adjustment first, then the long-run
adjustment. Each is an example of comparative statics. Alfred Marshall (1890) pioneered in
comparative-static period analysis.[6] He distinguished between the temporary or market period
(with output fixed), the short period, and the long period. "Classic" contemporary graphical and
formal treatments include those of Jacob Viner (1931),[7] John Hicks (1939),[8] and Paul
Samuelson (1947).[9]
The law of diminishing marginal returns to a variable factor applies to the short run.[10] It posits
an effect of decreased added or marginal product of from variable factors, which increases the
supply price of added output.[11] The law is related to a positive slope of the short-run marginal-
cost curve.[12]
The usage of 'long run' and 'short run' in macroeconomics differs somewhat from the above
microeconomic usage. J.M. Keynes (1936) emphasized fundamental factors of a market
economy that might result in prolonged periods away from full-employment.[13] In later macro
usage, the long run is the period in which the price level for the economy is completely flexible
as to shifts in aggregate demand and aggregate supply. In addition there is full mobility of labor
and capital between sectors of the economy and full capital mobility between nations. In the
short run none of these conditions need fully hold. The price is sticky or fixed as to changes in
aggregate demand or supply, capital is not fully mobile between sectors, and capital is not fully
mobile to interest rate differences among countries & fixed exchange rates.[14]
A famous critique of neglecting short-run analysis was by John Maynard Keynes, who wrote that
"In the long run, we are all dead," referring to the long-run proposition of the quantity theory of,
for example, a doubling of the money supply doubling the price level.[15]
In economics, capital, capital goods, or real capital refers to already-produced durable goods
used in production of goods or services. The capital goods are not significantly consumed,
though they may depreciate in the production process. Capital is distinct from land in that
capital must itself be produced by human labor before it can be a factor of production. At any
moment in time, total physical capital may be referred to as the capital stock, a usage different
from the same term applied to a business entity. In a fundamental sense, capital consists of any
produced thing that can enhance a person's power to perform economically useful work—a stone
or an arrow is capital for a caveman who can use it as a hunting instrument, and roads are capital
for inhabitants of a city. Capital is an input in the production function. Homes and personal autos
are not capital but are instead durable goods because they are not used in a production effort.
In Marxian economics, capital is used to buy something only in order to sell it again to realize a
financial profit, and for Marx capital only exists within the process of economic exchange—it is
wealth that grows out of the process of circulation itself and forms the basis of the economic
system of capitalism.[1]

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Long run and short run:

 enter an industry in response to (expected) profits

Long-run average-cost curve with economies of scale to Q2 and diseconomies of scale

In the short run, a profit-maximizing firm will:

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