Difference Between Short Run and Long Run

Short Run vs Long Run
 

Short run and long run are concepts that are found in the study of economics. While they may sound relatively simple, one must not confuse ‘short run’ and ‘long run’ with the terms ‘short term’ and ‘long term.’ Short run and long run do not refer to periods of time, such as explained by the concepts short term (few months) and long term (few years). Rather, short run and long run shows the flexibility that decision makers in the economy have over varying periods of time. The following article provides a clear explanation on each, and highlights the similarities and differences between short run and long run.

Short Run

Short run refers to a period of time within which the quantity of at least one input will be fixed, and quantities of other inputs used in the production of goods and services may be varied. Production of goods and services occur in the short run. Firms can increase output in a short run by increasing the inputs of variable factors of production. Such variable factors of production that can be increased in the short run include labor and raw materials. Labor can be increased by increasing the number of hours worked per employee, and raw materials can be increased in the short run by increasing order levels.

Long Run

The long run refers to a period of time in which the quantities of all inputs used in the production of goods and services can be varied. In the long run, all factors of production and costs involved in the production are variable. The long run allows firms to increase/decrease the input of land, capital, labor, and entrepreneurship thereby changing levels of production in response to expected losses of profits in the future. In the long run, a firm can enter an industry that is deemed profitable, exit an industry that is no longer profitable, increase its production capacity by building new factories in response to expected high profits, and decrease production capacity in response to expected losses. 

Short Run vs Long Run

It must be noted that there is no periods of time that can be used to separate a short run from a long run, as what is considered a short run and what is considered to be a long run vary from one industry to another. The following example provides a clear overview of the difference between short run and long run. Firm XYZ produces wooden furniture, for which following factors of production are needed: raw materials (wood), labor, machines, production facility (factory). Demand for wooden furniture has largely increased over the past month, and the firm would like to increase their production to cater to the increased demand. In this situation, the firm can order more raw materials and increase labor supply by asking workers to work overtime. As these inputs can be increased in the short run they are called variable inputs. However, other factors of production such as machinery and new factory building cannot be obtained in the short run. New machinery may take longer to buy, install and provide training to employees on its use. A new factory building will also require a longer period of time to build or acquire.  Therefore, these are fixed inputs. Further to this only existing firms will be able to respond to this increase in demand, in the short run, by increasing labor and raw materials. However, in the long run, new firms and competitors have the opportunity to enter the market by investing in new machinery and production facilities.

In Summary:

What is the difference between Short Run and Long Run?

• Short run refers to a period of time in which the quantity of at least one input will be fixed, and quantities of other inputs used in the production of goods and services may be varied.

• The long run allows firms to increase/decrease the input of land, capital, labor, and entrepreneurship thereby changing levels of production in response to expected losses of profits in the future.

• Only existing firms will be able to respond to increases in demand in the short run, by increasing labor and raw materials. However, in the long run, new firms and competitors have the opportunity to enter the market by investing in new machinery and production facilities.