The upcoming discussion will update you about the difference between short run and long run in theory of production.
In the theory of production, we are concerned with how inputs are converted into output. We are also interested in knowing how total product responds to an increasing application of a variable factor, keeping other factors fixed. The key concept here is production function which shows the relation of inputs and outputs. The Law of Diminishing Returns deals with short-run situations.
It is assumed that some of the factors used in production are fixed in supply. In the long run, however, a firm can vary the amounts of all the factors of production employed: more land can be acquired, more buildings erected and more machinery installed.
This means that in the long run it is possible for a firm to change the scale of its operation. The truth is that, a change of scale takes place only when the quantities of all the factors are changed by the same percentage so that the proportions in which they are combined remain unchanged.
The speed with which different kinds of factors can be varied largely depends on the time period under consideration. For the sake of analysis we assume that the firm is making decisions within two time periods, e.g., the short run and the long run.
The Short and the Long Runs:
The distinction between the short run and the long run is based on the difference between fixed and variable factors. A factor of production is treated as a fixed factor if it cannot easily be varied over the time period under consideration. On the other hand, a variable factor is one which can be varied over the time period under consideration. The short run refers to the period of time over which one (or more) factor(s) of production is (are) fixed.
In the real commercial world, land and capital (such as plant and equipment) are usually treated as fixed factors. Here we are considering a simple production process with only two factors. We treat capital as the fixed factor and labour as the variable factor.
Thus, output becomes a function of (i.e., output depends on the usage of) the variable factor labour, working on a fixed quantity of capital. In other words, if the firm wishes to vary its production in the short run, it can do so only by changing the quantity of labour. With a fixed quantity of capital, this necessitates changing the proportions in which labour and capital are combined in the production process.
The Long Run:
On the other hand, the long run is defined as the period over which all factors of production can be varied, within the confines of existing technology. In the long run all factors are variable. Moreover, the long run also permits factor substitution. More capital and less labour or more labour and less capital can be used to produce a fixed amount of output.
In the language of Lipsey and Harbury, “The long run is the period that is relevant when a firm is either planning to go into business or to expand or contract, its entire scale of operation. The firm can then choose those’ quantities of all factors of production that seem suitable. In particular it can opt for a new factory of any technologically feasible size. However, once the Planning decision has been carried out – the plant built, machines purchased and installed, and so on – the firm acquires fixed factors and it is operating in the short run.”
The Boundary between the Two:
The boundary between the short run and the long run is not defined by reference to any calendar time such as a year, or a month or a quarter. It varies from industry to industry and from time to time within the same industry.
In most plantation industries the long run is 15-20 years. For example, rubber trees require a very long time to grow. On the other hand, in a barber’s shop it may be just a week. A barber may require only a few days to make all types of changes in his small shop.
In fact, the boundary between the two runs is defined only in terms of the fixity of one factor of production. The length of the short run is influenced by two sets of considerations: technological (such as how quickly equipment can be manufactured or installed) and economic (such as the price the firm is willing to pay for equipment).
We may now turn to a consideration of how output varies in response to input changes in the short run as also in the long run. It may be noted, at the outset that short-run output changes reflect changes in the proportions in which factors are combined.
On the other hand, long-run changes in output reflect changes in the entire scale of operation. In other words, in short-run we study the returns to a variable factor (such as labour) and in the long run we study the return to scale.