Question

Explain the principle of Short Run and Long Run in microeconomics. (minimum a page )

Answer 1

In the process of production, individual or firm focus both the short run as well as long run cost and output scenarios , while making the decisions for the company . To understand yeh difference we must understand the basic concepts guiding for both the time periods.

A short run time period involves a time and space for any company or individual, where the output may be producing profit or loss . The cost is varying for the production and the average cost is not minimised. There is no concept of economies of scale as the production process has not fully achieved its full potential. There are scopes of expansions and inputs . In short run usually the firm's are trying to tap into the horizons of maximum growth which involves many trials and errors. Higher production possibility is there , if larger numbers of inputs are injected in the production process. The equilibrium of fixed cost , average cost , marginal cost and marginal and average revenue are not constant. There is fluctuations in the final equilibrium in the short run. The prices can be influenced via alterations in the production processes. foundation of long run production is sown in process of building the firm in short run.

On the other hand long run is a much stable equilibrium which is the output of the short run inputs which have been put in firm or industry. This is the time when the average cost is stable and no additional variable cost is present while the production process. The firm takes advantage of economies of scale as large production output capaciy has been developed over the period of time. The firm is in equilibrium and no additional production inputs can be added to increase or decrease the output level. In other words the avergae cost marginal cost , marginal revenues and averge revenue are in an equilibrium. The prices are not variable in long run. It must be noted that long run is not a time frame which is defined. It is the average time a firm or industry must reach in order to achieve stable equilibrium , and this must vary from firm to firm , depending on various factors. The profits are always normal in nature because incase a firm incures loss in long run, the firm will shut down and there will be no point in carrying he production.

This is how short run and long run equilibrium vart in micro economics.