Long run and short run

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"Long run" redirects here. For other uses, see Longrun (disambiguation).
In microeconomics, the long run is the conceptual time period in which there are no
fixed factors of production, so that there are no constraints preventing 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 variables may not fully adjust.[1]

Contents [hide]
1 Long run
2 Short run
3 Transition from short run to long run
4 Macroeconomic usages
5 See also
6 Footnotes
7 References
Long run[edit]
In the long run, firms change production levels in response to (expected) economic
profits or losses, and the land, labour, capital goods and entrepreneurship vary to
reach the minimum level of 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
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 = LRAC at the minimum LRAC and associated output. The shape of
the long-run marginal and average costs curves is determined by returns to 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]

Short run[edit]
All production in real time occurs in the short run. 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 outputs
Transition from short run to long run[edit]
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][10] The law is related to a positive slope of the short-
run marginal-cost curve.[11]

Macroeconomic usages[edit]
The usage of long run and short run in macroeconomics differs somewhat from the
above microeconomic usage. John Maynard Keynes in 1936 emphasized fundamental
factors of a market economy that might result in prolonged periods away from full-
employment.[12][13] In later macroeconomic usage, the long run is the period in
which the price level for the overall 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 level
is sticky or fixed in response to changes in aggregate demand or supply, capital is
not fully mobile between sectors, and capital is not fully mobile across countries
due to interest rate differences among countries and fixed exchange rates.[14]

A famous critique of neglecting short-run analysis was by 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]

See also[edit]
Cost curve (including long-run and short-run cost curves)
Footnotes[edit]
Jump up ^ Paul A. Samuelson and William D. Nordhaus (2004). Economics, 18th ed.,
[end] Glossary of Terms, "Long run" and "Short run."
Jump up ^ Melvin & Boyes, 2002. Microeconomics, 5th ed., p. 185. Houghton Mifflin.
^ Jump up to: a b c Boyes, W., 2004. The New Managerial Economics, p. 107. Houghton
Mifflin.
Jump up ^ Melvin & Boyes, 2002. Microeconomics, 5th ed., p. 185. Houghton Mifflin.
Jump up ^ Perloff, J, 2008. Microeconomics Theory & Applications with Calculus, p.
230. Pearson .
Jump up ^ John K. Whitaker, 2008. "Marshall, Alfred (18421924)," Price
determination and period analysis, The New Palgrave Dictionary of Economics, 2nd
Edition.
Alfred Marshall, [1890] 1890. Principles of Economics, Macmillan.
Jump up ^ Jacob Viner, 1931. "Costs Curves and Supply Curves," Zeitschrift fr
Nationallkonomie (Journal of Economics), 3, pp. 23-46. Reprinted in R. B. Emmett,
ed. 2002, The Chicago Tradition in Economics, 1892-1945, Routledge, v. 6, pp. 192-
215.
Jump up ^ J.R. Hicks, 1939. Value and Capital: An Inquiry into Some Fundamental
Principles of Economic Theory, Oxford.
Jump up ^ Paul A. Samuelson, 1947. Foundations of Economic Analysis, Harvard
University Press.
Jump up ^ The law of diminishing marginal r', 5th ed., p. 185. Prentice-Hall. ISBN
0-13-019673-8
Jump up ^ While the law does not directly apply in the long run it is not
irrelevant. The long run is the planning phase. A manager deciding which of several
plants to build would want to know the shape of the SR cost curves associated with
each of these plants. Marginal diminishing returns are related to the shape of the
short-run marginal and average cost curves. Thus the law indirectly effects long-
run decision making per R. Pindyck & D. Rubinfeld, 2001, Microeconomics, 5th ed.,
pp. 185-86. Prentice-Hall.
Jump up ^ Carlo Panico and Fabio Petri, 2008. "long run and short run," Short- and
long-period in Keynes, The New Palgrave Dictionary of Economics, 2nd Edition.
Abstract.
Jump up ^ John Maynard Keynes, 1936. The General Theory of Employment, Interest and
Money, pp. 45.
Jump up ^ N. Gregory Mankiw, 2002. Macroeconomics, 5th ed. pp. 240, 120, and
327329.
Jump up ^ J. M. Keynes, 1923. A Tract on Monetary Reform, p. 65. Macmillan.
References[edit]
Armen, Alchian, 1959. "Costs and Outputs," in M. Abramovitz, ed., The Allocation of
Economic Resources, ch. 2, pp. 23-40. Stanford University Press. Abstract.
Hirshleifer, Jack, 1962. "The Firm's Cost Function: A Successful Reconstruction?"
Journal of Business, 35(3), pp. 235-255.
Boyes, W., 2004. The New Managerial Economics, Houghton Mifflin. ISBN 0-395-82835-X
Melvin & Boyes, 2002. Microeconomics, 5th ed. Houghton Mifflin.
Panico, Carlo, and Fabio Petri, 2008. "long run and short run," The New Palgrave
Dictionary of Economics, 2nd Edition. Abstract.
Perloff, J, 2008. Microeconomics Theory & Applications with Calculus. Pearson. ISBN
978-0-321-27794-7
Pindyck, R., & D. Rubinfeld, 2001. Microeconomics, 5th ed. Prentice-Hall. ISBN 0-
13-019673-8
Viner, Jacob, 1940. "The Short View and the Long in Economic Policy," American
Economic Review, 30(1), Part 1, pp. 1-15. Reprinted in Viner, 1958, and R. B.
Emmett, ed. 2002, The Chicago Tradition in Economics, 1892-1945, Routledge, v. 6,
pp. 327- 41. Review extract.
Viner, Jacob, 1958. The Long View and the Short: Studies in Economic Theory and
Policy. Glencoe, Ill.: Free Press.
Categories: Production economics
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