The Short Run vs. the Long Run in Microeconomics

The Short Run vs. the Long Run in Microeconomics Many an economics student has pondered the difference between the long run and the short run in economics. They wonder, Just how long is the long run and how short is the short run? Not only is this a great question, but its an important one. Heres a look at the difference between the long run and the short run in microeconomics. Short Run vs. Long Run In the study of economics, the long run and the short run dont refer to a specific period of time, such as five years versus three months. Rather, they are conceptual time periods, the primary difference being the flexibility and options decision-makers have in a given scenario. In the second edition of Essential Foundations of Economics, American economists Michael Parkin and Robin Bade  give an excellent explanation of the distinction between the two within the branch of microeconomics: The short run  is a period of time in which the quantity of at least one input is fixed and the quantities of the other inputs can be varied. The long run is a period of time in which the quantities of all inputs can be varied. There is no fixed time that can be marked on the calendar to separate the short run from the long run. The short run and long run distinction varies from one industry to another. In short, the long run and the short run in microeconomics are entirely dependent on the number of variable and/or fixed inputs that affect the production output. Example of Short Run vs. Long Run Consider the example of a hockey stick manufacturer. A company in that industry will need the following to manufacture its sticks: Raw materials such as lumberLaborMachineryA factory Variable Inputs and Fixed Inputs Suppose the demand for hockey sticks has greatly increased, prompting the company to produce more sticks. It should be able to order more raw materials with little delay, so consider raw materials to be a variable input. Additional labor will be needed, but that could come from an extra shift and overtime, so this is also a variable input. Equipment, on the other hand, might not be a variable input. It might be time-consuming to add equipment. Whether new equipment will be considered a variable input will  depend  on how long it would take to buy and install the equipment and to train workers to use it. Adding an extra factory, on the other hand, is certainly not something that could be done in a short period of time, so this would be the fixed input. Using the definitions at the beginning of the article, the short run is the period in which a company can increase production by adding more raw materials and more labor but not another factory. Conversely, the long run is the period in which all inputs are variable, including factory space, meaning that there are no fixed factors or constraints preventing an increase in production output. Implications of Short Run vs. Long Run In the hockey stick company example, the increase in demand for hockey sticks will have different implications in the short run and the long run at the industry level. In the short run, each firm in the industry will increase its labor supply and raw materials to meet the added demand for hockey sticks. At first, only existing firms will be likely to capitalize on the increased demand, as they will be the only  businesses that have access to the four inputs needed to make the sticks. In the long run, however, the factory input is variable, which means that existing firms are not constrained and can change the size and number of factories they own while new firms can build or buy factories to produce hockey sticks. In the long run, new firms will likely enter the hockey stick market to meet the increased demand. Short Run vs. Long Run in Macroeconomics One of the reasons the concepts of the short run and the long run in economics are so important is that their meanings vary depending on the context in which they are used. which also is true in macroeconomics.