SHORT RUN AND LONG RUN
Production requires not only labor and land but also time. Pipelines cannot be built and once built they last for decades, Farmers cannot change .crops in mid season. It often takes a decade to plan construct. test, and commission a large power plant.
Moreover. once capital equipment has been put in the concrete form of a giant automobile assembly plant. the capital cannot be economically dismantled and moved to another location or transferred to another use.
To account for the role of time in production and costs, we distinguish between two different time periods. We define the short run as a period in which firms can adjust production by changing variable factors such as materials and labor’ but cannot change.
fixed factors such as capital. The log run is a period sufficiently long that all factors including capital can be adjusted.
To understand these concepts more clearly. consider the way the production of steel might respond to changes in demand. Say that Nippon Steel is operating its furnaces at 70 percent of capacity when an unexpected increase in the demand for steel oc-
, curs because of the need to rebuild from an earthquake in Japan or California. To adjust to the higher demand for steel. the firm can increase production by increasing worker overtime. hiring more workers and operating its plants and machinery more intensively.
The factors which are increased in the short. run are called variable factors. Suppose that the inches in steel demand persisted for an extended period of time. say. several years. Nippon, Steel would examine its capital needs’ and decide that it should increase its productive capacity. More generally. it might examine all its find. factors, those that cannot .be changed in the short run because of physical conditions or legal contracts, , The period of time o~er which all inputs. fixed and variable. can be adjusted is called he long run, In the long run. Nippon might add new and more efficient production processes. install a rail link or new computerized control system, or build a plant in Mexico. When all factors can be adjusted. the total amount of steel will be higher and the level. of efficiency can increase. Efficient production requires lime as well as conventional inputs like labor, We therefore distinguish between two different time periods in production and cost analysis. The short I’W1 is the period of time in which only some inputs. the variable inputs. can be adjusted. In the short run, fixed factors, such as plant and equipment. cannot be.’ fully modified or adjusted. The long run is the period in which all factors employed by the firm. including capital. can be changed.
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