Lecture Notes: Short Run vs. Long Run in Microeconomics

Summary

In today's lecture, we explored the concepts of "short run" and "long run" in microeconomics, focusing on their relevance to business decisions and operational strategies. These periods do not refer to specific lengths of time but rather to the flexibility a firm has in changing its operational constraints and decision-making processes.

Key Concepts

Short Run

• The "short run" is defined by fixed constraints within which a company must operate. It involves decision-making within these set boundaries.

• Characteristics:

  • Fixed number of resources (e.g., machinery, labor contracts).
  • Decisions are centered around optimizing the use of these existing resources.
  • The firm can adjust variable factors like the number of workers or production hours but cannot alter fixed resources.

• Example: If a company has five machines, a maximum of 30 workers, and uses 70 bags of wood to produce up to 1000 units daily, these are its short-run limits.

• Operations:

  • Change in production volume (e.g., producing between 0 to 1000 units based on existing constraints).
  • Adjust number of shifts and workers as long as it remains within the limits of fixed machinery and space.

• Costs:

  • Composed of fixed costs (unchangeable in the short run) and variable costs.
  • Total costs in the short run = Fixed costs + Variable costs.
  • In terms of cost calculation, Average Total Cost (ATC) in the short run = Average Variable Cost (AVC) + Average Fixed Cost (AFC). AVC is always less than ATC due to fixed costs.

Long Run

• The "long run" allows for complete flexibility in decision-making with no fixed constraints. Businesses can redefine their operational scale and scope.

• Characteristics:

  • Businesses can acquire or dispose of fixed assets, enter new markets, or entirely change their product lines.
  • Strategic decisions like relocating, changing the production process, or altering product material (e.g., from wood to plastic) are possible.

• Operations:

  • All resources are variable, and decisions on them are unrestricted.
  • Implies opportunities for expansion, downsizing, or modifying the production methods as per strategic needs.

• Costs:

  • No fixed costs; all costs are considered variable.
  • Total Cost in the long run = Variable Cost (as fixed costs are absent).
  • Average Total Cost (ATC) in the long run equals Average Variable Cost (AVC) because there are no fixed costs distributing over output.

Examples

• A company uses five machines in a facility that can change the number of machines in the long run, based on their strategic goals, different from what is possible in the short run where the number of machines is fixed.
• Moving a manufacturing plant from Philadelphia to Mexico is a decision feasible only in the long run due to its significant impact on fixed resources and long-term strategic implications.

Profit and Loss Considerations

Short Run

• Profits: Can be sustained if external competitive pressures remain absent because other firms cannot immediately enter the market.
• Losses: Can be endured temporarily as firms are still obligated to cover fixed costs and might expect circumstances to improve.

Long Run

• Profits: Not sustainable as competitors can restructure and enter profitable markets, eroding existing profits.
• Losses: Not acceptable long-term, prompting firms to strategize exiting or modifying loss-inciting sectors or practices.

Conclusion

Understanding the distinctions between the short run and long run helps firms in strategic planning and operational adjustments, vital for navigating through competitive environments and maximizing profitability over different timelines.