Short run and long run
| Short run and long run |
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| See also |
Short run is a period of time in which the quantity of at least one input is fixed and cannot be changed. In the short run, firms are limited by the number of resources they have. In the short run, management aims to maximize profits by controlling costs, increasing efficiency, and improving production processes.
Long run is a period of time in which all inputs are variable and can be changed. In the long run, companies can adjust production processes, expand their operations, and diversify their product lines to increase profits. Management focuses on optimizing capital investments, increasing market share, and creating economies of scale. In the long run, businesses can make major changes to their operations that may not be possible in the short run.
Example of short run and long run
- Short Run Example: A small business owner has limited resources, such as capital, labor, and materials. In the short run, the owner must use these resources to maximize profits. The owner may decide to reduce production costs, increase efficiency, or improve production processes.
- Long Run Example: A large company may decide to invest in new technology and equipment to increase production capacity and efficiency. In the long run, the company can make large scale changes that may not be possible in the short run. For example, the company may choose to expand into new markets, diversify its product lines, or invest in research and development.
When to use short run and long run
Short run and long run are two different time frames used to make decisions based on the availability and cost of inputs. The short run is used for decisions that require a quick response, while the long run is used for decisions that require more time and resources.
- Short run decisions are typically focused on controlling costs, increasing efficiency, and improving production processes. Examples of short run decisions include setting prices, managing inventory, and deploying resources.
- Long run decisions are typically focused on optimizing capital investments, increasing market share, and creating economies of scale. Examples of long run decisions include expanding production, developing new products, and entering new markets.
Steps of short run and long run decisions
Short Run:
- Identify the current factors of production, such as labor, capital, and land.
- Determine the amount of resources needed to produce the desired output.
- Analyze current production methods and make adjustments to increase efficiency.
- Set prices for the product or service to maximize profits.
- Evaluate the performance of the business in the short run.
Long Run:
- Develop a business plan to define the company’s mission, vision, and goals.
- Analyze the current business environment to identify opportunities for expansion.
- Invest in new technologies and resources to improve production processes.
- Diversify product offerings and explore new markets.
- Evaluate the performance of the business in the long run and make necessary adjustments.
Advantages of short run and long run
Short run advantages:
- The short run allows companies to quickly adjust production processes to meet changing demand. This can help them maximize profits in a short period of time.
- It is easier to control costs in the short run, as companies can quickly adjust production processes and staffing levels to reduce costs.
- The short run also allows companies to quickly test new products and processes. This can help them determine which products and processes are successful and which ones are not.
Long run advantages:
- In the long run, companies can invest in capital projects and long-term strategies to increase their profits.
- It is easier to achieve economies of scale in the long run, as businesses can expand their operations and increase production without sacrificing quality.
- The long run also allows companies to diversify their product lines and enter new markets, which can help them increase their market share and boost their profits.
Limitations of short run and long run
Short run limitations:
- Limited resources: in the short run, firms are limited by the number of resources they have, making it difficult to expand operations or make major changes.
- Lower profits: production processes are limited, making it difficult to maximize profits.
- Difficulty in diversifying: firms cannot easily diversify their product lines in the short run.
Long run limitations:
- Capital investment: businesses must make large investments in order to expand operations, diversify their product lines, and create economies of scale.
- Market share: it can be difficult to increase market share without investing in marketing and advertising.
- Time: it takes time to make major changes to operations and to realize the benefits of those changes.
Suggested literature
- Jan, Y. C., & Chiu, S. L. (2008). Long-Run Investment Decision in the Taiwan Exchange Market. Welcome to Hawaii, 87.
- Wulff, D. U., Hills, T. T., & Hertwig, R. (2015). How short-and long-run aspirations impact search and choice in decisions from experience. Cognition, 144, 29-37.
