Question

What does it mean to be operating a firm in the "long run?"  What does it mean to be operating a firm in the "short run"?  What are the practical implications for managing a business if you are in "short run?"

Answer 1

Here, operating a firm in long run or short run is not about the comparison of time period only rather it is an ecominics concept. There is no fixed time period based on which we can separate the short run from the long run concept.

So, to operate a firm in long run means a time period where different costs and factors of production are all variable in nature.

In case of a firm operating in short run, they atleast have one input fixed and other inputs may be varied.

Therefore, we can say that the long run and the short run are entirely dependent on the variable and the fixed inouts that has an impact on the production output. A firm may be in monopolistic market in short run but they can expect to be in competitve market in the long run. In long run a firm can make adjustments to all its costs because of its variable nature but in the short run it can make adjustments only on the basis of the production levels.

The practical implications for managing a business in short run is that each firm in the industry will try to increase their labour and other inputs to meet the added demand in the market. Whereas, in long run the firms can increase the production capacity and size of the factory and can open new factories or units to meet the increased demand which is not possible in the short run.