The time period
Definition
Short run: the period in which at least one factor of production (often capital) is fixed, so output can only be varied within existing capacity.
Long run: the period in which all factors of production are variable, so the firm can change its whole scale of production.
Very long run: the period in which the state of technology can also change, altering what it is possible to produce.
- Which decisions a firm or an economy can take depends on the time horizon under consideration.
- The periods are defined by what can be varied, not by a fixed number of weeks or months.
- As the horizon lengthens, more factors become variable, so more adjustment becomes possible.
Key Idea
- The short run has at least one fixed factor; the long run has none.
- The very long run allows the state of technology itself to change.
The three periods
- In the short run, at least one factor, often capital, is fixed.
- A firm can hire more workers but cannot yet build a new factory.
- In the long run, all factors can be varied, so a firm can change its scale of production.
- It can build new plant, or enter and leave an industry.
- In the very long run, the state of technology can also change.
- New inventions can change what it is possible to produce.
Note
- These are not fixed lengths of clock time.
- They differ by industry, depending on how quickly factors can be changed.
- The short run for a hairdresser is far shorter than for a power station.
Time and supply
- The responsiveness of producers differs across the periods.
- Supply becomes more elastic the longer the time horizon.
- More factors can be adjusted, so output can respond more fully to a price change.
- The nature of the decision, such as varying labour or building a factory, depends on the period.
Example
- Demand for a bakery's bread rises sharply and the price it can charge increases.
- In the short run it can only add shifts and overtime, because the ovens are fixed, so output rises a little.
- In the long run it can install more ovens or open a second site, so output rises much more.
- In the very long run a new baking technology could change how much one worker can produce.
Exam technique
- Define the short run by having at least one fixed factor.
- Define the long run by all factors being variable.
- Note the very long run allows technology to change, and stress these are not fixed clock-time lengths.
Common Mistake
- Do not define the short run as a fixed number of months, because it is the period in which at least one factor is fixed.
- Do not confuse the long run with the very long run, because only the very long run also changes technology.
Self review
- What defines the short run?
- What defines the long run?
- What is different about the very long run?
- Why is supply more elastic in the long run?
- Are these periods fixed lengths of clock time?
