What this lesson teaches
I can explain a firm's cost and revenue concepts in the short run and the long run.
Syllabus 9570, 2.2.2(a). Cost and Revenue: Firms' cost and revenue concepts in the short run and long run
Make a guess
A hawker stall can rent a bigger stall within three weeks. A chip factory needs four years to build a new plant. Which firm has the longer "long run"?
- Both, because the long run is always more than a year.
- The hawker stall, because small firms plan further ahead.
- The chip factory, because it needs longer to change all its inputs.
Show the answer
The chip factory, because it needs longer to change all its inputs.
The long run is defined by when every input can change, not by a set number of months. For a chip plant, that takes years.
In the short run at least one input is fixed; in the long run every input can change.
The short run is a period in which at least one factor of production, usually capital such as premises or machines, cannot be changed.
The long run is a period long enough to change all inputs: move to a bigger shop, buy new machines, or leave the industry.
These periods are not set lengths of time. A hawker stall can change its whole set-up in weeks; a wafer fab needs years to build a new plant.
The difference matters for decisions. In the short run, a firm may keep running at a loss; in the long run, it must cover all its costs or exit.
- Short run
- At least one input is fixed.
- Long run
- All inputs can change.
Worked example: A bakery's oven
A bakery can change how much flour it buys and how many staff work each shift this week. It has one oven and a two-year lease on its kitchen.
- Flour and staff hours are variable inputs.
- The oven and the kitchen are fixed in the short run.
- When the lease ends, the bakery can move to a bigger kitchen with more ovens: that is the long run.
Watch out for this
The short run is always less than a year.
It is defined by what can be changed, not by time. For some firms the long run is weeks; for others it is years.
Check your understanding
Which describes the long run for a restaurant?
- A period in which it can change only ingredients and staff hours.
- A period long enough to change its premises and kitchen equipment as well as staff.
- Any period longer than one year, since most leases and contracts run for a year.
Show the answer
A period long enough to change its premises and kitchen equipment as well as staff.
Right. In the long run, every input can be changed.