Question

What is the distinction between the short run and the long run? In reality, does a company operate in the short run or in the long run? How do you know? Is it a reasonable distinction to have for a company? With respect to profit and loss, what is the economic goal of business? How does maximizing profits accomplish that goal? What should, in your opinion, be the goal of a business? Identify three types of industries that fit into the Perfect Competition industry. Justify why you would classify each one into Perfect Competition. What happens in the long run to existing companies in an industry? To the new companies in the industry and to the industry as a whole? What will happen to the price and average costs in the long run? If the MC is greater than the ATC, and the MC is increasing, what will happen to the ATC and the AVC? If the MC is less than the ATC and the MC is decreasing, what will happen to the ATC and AVC? Explain. What are economic profits? How are they different than accounting profits? Should there be a difference? How do businesses make those types of profits? Is it true that a company in a perfect competition industry will have a perfectly elastic demand and supply? Why or why not? Why do the long run average costs decline first and then begin to rise? Is this pattern observed in the real world? Can you give examples of this? Why would a firm choose to operate at a loss in the short run? Explain carefully. Answer the following questions: A profit-maximizing business incurs an economic loss of $10,000 per year. Its fixed cost is $15,000 per year. Should it produce or shut down in the short run? Should it stay in the industry or exit in the long run? Suppose instead that this business has a fixed cost of $6,000 per year. Should it produce or shut down in the short run? Should it stay in the industry or exit in the long run?

Answer 1

The main difference between short run and long run is that in the long run there are no fixed costs whereas in the short run there are both fixed and variable costs. In the short run input quantities cannot be changed as there is no sufficient time whereas in the long run all input quantities can be optimized to get maximum profit. Yes, in reality a company operates in the long run. We know this because in the short run only the labour quantity is variable and all the other variables are fixed whereas in the long run all other variables like wages, machinery and technology used are all bound to change. If we observe any company it's production process must have changed over the years to include technological advancements that make the production process more efficient and faster. This itself is an indicator that the company is operating in the long run. It is not just the technology that changes. Price level,wage rates and output expectations all vary over time according to the state the country's economy is in. It is a reasonable distinction to have for the company because we look at short run when we need to know the current technology, wage and price levels,etc. whereas it would be foolish to assume that these levels will be maintained forever, hence the distinction between short run and long run