The Short Run and The Long Run
Categories: Freshers Study Economics Intermediate class NCERT
The Short Run and The Long Run
Before we begin with any further analysis, it is important to discuss two concepts–the short run and the long run. In the short run, at least one of the factor – labour or capital – cannot be varied, and therefore, remains fixed. In order to vary the output level, the firm can vary only the other factor. The factor that remains fixed is called the fixed factor whereas the other factor which the firm can vary is called the variable factor.
Consider the example represented through Table 3.1. Suppose, in the short run, capital remains fixed at 4 units. Then the corresponding column shows the different levels of output that the firm may produce using different quantities of labour in the short run. In the long run, all factors of production can be varied. A firm in order to produce different levels of output in the long run may vary both the inputs simultaneously. So, in the long run, there is no fixed factor. For any particular production process, long run generally refers to a longer time period than the short run. For different production processes, the long run periods may be different. It is not advisable to define short run and long run in terms of say, days, months or years. We define a period as long run or short run simply by looking at whether all the inputs can be varied or not. The reasoning is that output prices (i.e. prices of products sold to consumers) are more flexible than input prices (i.e. prices of materials used to make more products) because the latter is more constrained by long-term contracts and social factors and such. In particular, wages are thought to be especially sticky in a downward direction since workers tend to get upset when an employer tries to reduce compensation, even when the economy overall is experiencing a downturn.
The distinction between the short run and the long run in macroeconomics is important because many macroeconomic models conclude that the tools of monetary and fiscal policy have real effects on the economy (i.e. affect production and employment) only in the short run and, in the long run, only affect nominal variables such as prices and nominal interest rates and have no effect on real economic quantities.