Short Run vs. Long Run

The long run and the short run do not refer to a specific period of time such as 3 months or 5 years. The difference between the short run and the long run is the flexibility decision makers have. The 2nd edition of Parkin and Bade's "Economics" gives an excellent distinction between the two:

"The short run is a period of time in which the quantity of at least one input is fixed and the quantities of the other inputs can be varied. The long run is a period of time in which the quantities of all inputs can be varied.

There is no fixed time that can be marked on the calendar to separate the short run from the long run. The short run and long run distinction varies from one industry to another."

I find examples helpful, so we'll consider a hockey stick manufacturer. A company in that industry will need the following to manufacture sticks:

·         Raw materials such as lumber

·         Labor

·         Machinery

·         A factory

Suppose the demand for hockey sticks has greatly increased, prompting our company to produce more sticks. We should be able to order more raw materials with little delay, so we consider raw materials to be a variable input. We'll need extra labor, but we can likely increase our labor supply by running an extra shift and getting existing workers to work overtime, so this is also a variable input. The equipment on the other hand, may not be a variable input. It may be time consuming to implement the use of additional equipment. It depends how long it would take us to buy and install the equipment and how long it would take us to train the workers to use it. Adding an extra factory is certainly not something we could do in a short period of time, so this would be the fixed input.

Using the definitions given at the beginning of the article, we see that the short run is the period in which we can increase production by adding more raw materials and more labor. In the short run we cannot add another factory, but in the long run all of our inputs are variable, including our factory space.

The increase in demand for hockey sticks will have different implications in the short run and the long run at the industry level. In the short run each of the firms will increase their labor supply and raw materials to meet the added demand for hockey sticks. At first only existing firms will be likely to capitalize on the increased demand as they will be the only ones who will have access to the four inputs needed to make the sticks. However we know that in the long run the factor input is variable as well. This means that existing firms can change the size and number of factories they own and new firms can build or buy factories to produce hockey sticks. In the long run we will see new firms enter the hockey stick market, while we will not in the short run because firms will not be able to acquire all of the inputs they need.

Short Run vs. Long Run In Summary

Short Run: Some inputs variable, some fixed. New firms do not enter the industry, and existing firms do not exit.

Long Run: All inputs variable, firms can enter and exit the market place.