Question

2. What is the distinction between the microeconomic short run and the microeconomic long run? How do these definitions relate to specific periods of calendar time?

Answer 1

The Short Run vs. Long Run

In the study of economics, the long run and the short run do not refer to a specific duration or period of time such as three months versus five years.

Rather, they are conceptual time periods with the primary difference between them being the flexibility and options decision makers in a given scenario have.

"The short run [in economics] 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 is entirely dependent on the number of variable and/or fixed inputs that affect the production output.

An Example of Short Run vs. Long Run

Many of my students find examples helpful when trying to grasp new and potentially confusing concepts. So we'll consider the example of a hockey stick manufacturer. A company in that industry will need the following to manufacture their sticks:

• Raw materials such as lumber

• Labor
• Machinery
• A factory

Variable Inputs and Fixed Inputs

Suppose the demand for hockey sticks has greatly increased, prompting our company to produce more sticks. We should be able to order more raw materials with little delay, so we consider raw materials to be a variable input. We'll need extra labor, but we can likely increase our labor supply by running an extra shift and getting existing workers to work overtime, so this is also a variable input.

The equipment, on the other hand, may not be a variable input. It may be time-consuming to implement the use of additional equipment. Whether new equipment will be considered a variable input will depend upon how long it would take us to buy and install the equipment and how long it would take us to train the workers to use it. Adding an extra factory, on the other hand, is certainly not something we could do in a short period of time, so this would be the fixed input.

Using the definitions given at the beginning of the article, we see that the short run is the period in which we can increase production by adding more raw materials and more labor, but cannot add another factory. Conversely, the long run is the period in which all of our inputs are variable, including our factory space, meaning that there are no fixed factors or constraints preventing an increase in production output.

Implications of the Short Run vs. Long Run

In our hockey stick company example, the increase in demand for hockey sticks will also have different implications in the short run and the long run at the industry level. In the short run, each of the firms in the industry will increase their 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 who will have access to the four inputs needed to make the sticks.

In the long run, however, we know that the factor 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. Unlike the short run, in the long run we will likely see new firms enter the hockey stick market to meet the increased demand.