all right so now we're going to talk about a very important concept which we're gonna see several times throughout the semester in microeconomics it's a very important conversation understanding the difference between what we call the short run and the long run in a firm now it's not the short run in the long run doesn't have anything to do with timeframe okay so for example oftentimes in accounting we have the short run and the long run as being you know the short run is in days and months the long run is in more than a year okay well in economics the short run and the long run are more like decision-making periods for example in the same building at the same time you can have two groups of managers one of them is talking about the short run and one of them is talking about the long run one group is making decisions in the short run one of them is making decisions in the long run even though they're doing it at the same time now we're gonna take our example that we had with the company that had five machines and they're producing the product out of wood by employing the workers and we're gonna use that example to understand the short run versus the long run so what the circumstance that we first set up where we said this company has five machines and if they run those five machines on two shifts they can employ 30 workers maximum they can use 70 bags of wood maximum per day and they can produce a thousand units per day maximum okay all of that these are the restrictions in the short run the short run is always restricted in decision-making in the short run this firm can decide you know what we're going to shut down two of the machines we're only gonna have nine employees at a time and we're gonna run two shifts and therefore they will then employ 18 out of the 30 possible workers that's a short run to that would then mean that they were only producing 600 units that's a short-run decision they can produce anywhere between 0 and 1,000 units in the short run and they're gonna make short-run decisions to try and maximize their profit given their fixed set of circumstances okay that is the short-run okay in the long run they are not restricted by their 5 machines in the long run they can change their fixed circumstances there is no fixed circumstance in the long run in the long run they can buy more of the machines they can increase or decrease the number of the machines which will change their limits on the number of workers bags and their quantity so in the long run they can change the limits on their variable costs and their quantities by buying more machines or selling off some of their machines they can also change the process entirely they can stop using machines and have the product entirely made just by labor they can also change the process to where the entire process is automated where they don't need any labor at all they can have the machines do the entire process so in the long run you can change your fixed circumstan umber of machines you have you can also change the way you do it you can change the product itself you can stop selling the product that you have sold for 20 years let's say that you used to sell desks well you can just stop making desks and you can start making staplers if you want to you can completely change the product that you sell you can stop making your product out of wood and start making it out of plastic if you want to that is a long-run decision okay you can change location well we've always had this manufacturing plant in Philadelphia we've been operating here for over 70 years well you can close down that plant and you can open up a plant in Mexico if you want to that is a long-run decision you can even stop doing business altogether you can just close down the business and say we're not in business anymore shut the doors everybody gets laid off and the owner of the company retires those are long-run decisions in the long run there are no limitations at all to any of the decisions that can be made because in the long run there are no fixed resources and now we're going to get into more details on those two ideas so let's talk about the short run first okay so here's a definition for the short run in microeconomics the short run is a circumstance or state of planning in which a firm has fixed costs that restrict or limit decision making and limit production and profit okay so that is the short-run we are in a situation where we're just making decisions around our fixed costs so the short-run is kind of like okay look here's my bedroom you know there's a window over here there's a door over there there's another door over here for the closet I only have so much wall space where am I going to put my bed where am I going to put my dresser now the good news is in the short-run I can change the size of my bed if I have a king-sized bed and it just won't fit in the room I can get a smaller bed because the bed isn't that expensive what I can't do is I can't move the doors and I can't move the window I can't make new wall space to be able to hang posters and that sort of thing I only have so much room for hanging posters if I decide to put a bookshelf over here I can't put posters over there and therefore we are limited by the shape of the room the square footage of the room and around those limitations we can decide where to put the furniture similarly our company UGI corporation right they are limited by the fact that they have exactly five machines they can only hire so many people they can only buy so many wood chips they can only supply up to a thousand units a day because they are limited by their fixed resources in the short run fixed resources they can't be altered okay we can shut down a machine but we can't we can't make the Machine go away we're stuck with the machine the reason that fixed resources can't be altered is usually because those fixed resources are very expensive and we're in the middle of making payments on those expensive resources okay so because we're still paying for them we can't do anything about them other than have them there and use them as best we can and also in the long err in the short run often times we have long term contracts you know if we have committed to stay in a particular retail location for 10 years we can't leave that leap retail location until our lease is up and then at the end of 10 years we can then leave it and go to another location also sometimes you'll have a long-term contract with some employees if you have contracted with some information technology employees to do a job over two years you have to pay them for that two years if you decide you want to fire them you still have to pay them for the two years so you may as well use them okay so under long-term contracts and also expensive now in the short run only variable resources can be increased or decrease we can increase our workers up to 30 we can decrease our workers down to zero we can increase the number of bags per day that we buy up to seventy or down to zero but that's it okay we are limited by our fixed resources now because we have fixed costs in the short run our total costs are determined by variable cost plus fixed costs as we learned right this is our formula for total cost but you're going to see that it's now different when we get to the long-run average total cost very similar is equal to average variable cost plus average fixed cost okay and therefore a couple things here because we have fixed costs variable costs are always going to be less than total cost okay total cost will always be a larger number than variable costs similarly because we have average fixed cost because we have fixed costs average variable cost will always be a smaller number than average total cost of course if average fixed cost approaches zero average variable cost will approach average total cost mathematically last thing we're going to say about the short-run is in the short-run the firm is limited by its limited by its size it will not be larger than it is and it can be smaller but really you know you if you're gonna be smaller you may as well just go out of business right okay but you can't compete in with with five machines you can't compete with a company that has like you know 73 machines I mean you can compete with them in the sense that you can sell what they sell but you can't think that you're going to be earning the profit that they earn on their level they have 73 machines you are you your size is restricted to only five machines a firm is limited by its location let's say that you own a pizzeria right on the south side of town right you're not gonna deliver pizza on the north side of town you know it takes 40 minutes to drive there so you're not gonna deliver pizza you're not going to do any business on the north end of town because you are limited by your fixed resources that are all at the south end of town okay so you are limited by your location you're not going to move in the short run you're also limited by your product okay you can make minor adjustments to the product if you make pizza you can add a new topping you can tell everybody hey you know now we have pineapple we'll put pineapple on your pizza but what I'm saying is you know in the in the short-run you're not gonna stop making pizza and start making you know steaks or something like that okay you're not you're not getting rid of your pizza oven and bringing in a charcoal grill in the short run okay that is a that is a those are fixed resources and we're not changing our fixed resources in the short-run okay all right so this is the short run now let's talk about the long run all right now let's talk about the long run here's our definition for the long run it's a circumstance or state of planning in which decision-making in a firm is not constrained by any fixed costs making it free to redefine its fixed resources and its strategy this is a time when leaders come together and they think to themselves anything is possible what can we do we can shut down all of our operations move to other countries reopen change our product change our size we can stop selling to consumers and we can start selling to other businesses we can change anything that is the circumstance in the long run a business can completely redefine what it is in the long run now I'm sure most businesses don't go to those extremes in the long run in many cases businesses in the long run just sort of you know grow or they open a new location in other places they just sort of expand okay these are the kinds of things that you would learn about in a strategy class a class on policy and planning for a business usually that's the capstone course for a business degree okay now in the long run a firm has no fixed resources now I'm not saying that they don't have their five machines what I'm saying is that when they're in the room thinking in the long run when they're in the state of planning in decision-making they're thinking to themselves let's forget about the fact that we are stuck with these five machines let's think about a world where we can get rid of the five machines or double up the machines or we can go from five up to 70 machines if we want to we can bring on investors in the long run we can take all their money and we can increase from five machines up to a hundred and fifty machines possibly we can open up you know three more locations over the next five years okay this is you know we're we're not you know constraining ourselves we're pretending that we have no fixed resources so that we can think broader and make any kind of decision in the long run there are no contract contracts constraining us no leases no labor contracts none of that constraining us there are no payments on debt we're in a place where we are not thinking about the our payments on our machines we're thinking okay assuming we've paid off the machines now what can we do okay all right in the long run even expensive capital is variable we can think to ourselves hey well what if we had seven machines okay what if we had eight machines okay what if we had nine machines okay so we can have a column where in where our fixed resources instead of being in the fixed cost column they're actually in the variable cost column because all of the resources even the expensive ones our variable all resources and costs are variable in the long run and because there are no fixed costs in the long run total cost is equal to variable cost it's the same number there is no variable cost plus fixed cost because fixed costs are zero we have no fixed costs therefore in the long run total cost is equal to variable cost similarly in the long run average total cost is equal to average variable cost they are the same number because all of the costs in the long run are variable costs lastly in the long run a firm has no limits and can change they can change the size of the company they can make the company larger they can go from five machines up to 40 machines they can make the company smaller they could go from five machines down to two machines if they want to they can change their location if you got your pizzeria in the south end of the of the city you could make a couple decisions one you could say hey let's open up a second pizzeria on the north end now we can deliver to all the people in the north or you can say hey we don't really like this location anymore let's close the South location we will not renew our lease let's find a location on the north end of the city we'll fight we'll find a retail location and we'll sign a five-year lease up there and then we can start delivering pizza to the people on the north end okay they can change your location they even change go from one country to another country and lastly in the long run firms can completely change their products like I said they can stop stop making their product out of plastic and they can start making their product out of Steel they can stop making pencils and they can start making cameras if they want to in the long run a company can completely change the products that they sell the products that they can produce they can even stop making the product you know the make or buy decision they can stop making the product and they can contract with another company that has the machines and just buy the product from that company and then be the middleman and sell it to someone else so there's anything that you can do you can sell everything you can get rid of everything you can double up on everything you can triple up on everything in the long run and that's the big difference between the short run and the long run all right so the last thing that we're going to talk about in terms of short run and long run is we're going to talk about how the short run and the long run changes the way a firm looks at profit and loss that they are experiencing in their business okay so we've got profit and loss in the short run and long run all right so let's talk about the short run first and we'll talk about profit well we'll talk about profit and first we'll address it in the short run in the short run if a company is profiting that profit can be sustained if they're in the short run they can just keep doing business and earning that profit and earning that profit positive profit just keep scooping it in okay because here's the issue people who would want to take away that profit the way that businesses take away profit from other businesses is by moving into their markets and competing directly with them so if I have a burger restaurant and I'm making profit and another burger restaurant moves in right across the street some of the people who would come get a burger from me are now gonna go get a burger from that burger restaurant across the street and I will lose some of my profit okay but in the short run see opening up a burger restaurant across the street that's a long run decision and since we're in the short run that company there there aren't going to be any competitors moving into my market okay so competitors cannot enter your market so you can sustain the profits here earning but in the long run profit profits do not last okay the reason that profits do not last is because now in the long run competitors can invest fixed resources in your profitable profitable market they can move in to your market and they can take some of your customers and some of your profit with them okay and so big difference between the short run in the long run generally speaking in the long run profits do not last now you might be thinking well then why in the world do business if profits don't last in the long run well what we're talking about here is economic profit not accounting profit and we'll explain that a little more later okay but the idea here is that typically profits do not last in the long run because competitors will always move in and take away some of your profit all right lastly let's talk about losses in the short run if a firm is experiencing a loss if their total costs are higher than their total revenues well you might say well they should just shut down right maybe but only in a very rare situation should they actually shut down C in the short run a firm can endure losses losses can be endured in the short run why well firms they still have to cover their fixed costs if they just shut down they still got to pay their rent on their retail location they're under a five-year contract a five-year lease if they're still paying off machines that they bought they've got to still make the payments on those machines they can't just default on those loans that could get them in big trouble and they can be sued those by the by the bank that made the lung and therefore because they have fixed costs to cover they can't they can't afford to quit if they keep doing business even if it's not enough to cover all the costs they can at least cover some of the costs keep doing business in der through the losses and maybe in the short run there might be a change to prices or something like that or they might improve the way they're doing business in the short run and move from a loss to a profit or at least to a break-even situation what about in the long run in the long run losses are not acceptable in the long run if you're in the long run if you're planning for the future and you're in a market and already you know that you're losing in that market why commit more resources to it get out in the long run you can get out in the long run you can close down in the long run you can move somewhere else in the long run you can change your products you can become smaller if you need to or maybe becoming larger will actually put you in a place where you're not losing anymore okay but then that would move you up here to profits but if loss is what you're facing and your company is in the long run decision making losses are not acceptable because there are no fixed costs okay that you shouldn't be you know don't commit to an already losing situation you should just go ahead and leave the market okay and so here is the different ways that firms look at profit and loss whether they're dealing with the short run or the long run