how the long run works
the term long run is used to describe an economic situation in which a manufacturer or producer is flexible in its production decisions this situation is characterized by variable inputs including capital labor materials and equipment among others businesses can either expand or reduce production capacity when there is a long run there is also the chance to enter or exit an industry based on expected profits firms understand that they cannot change their levels of production in order to reach an equilibrium between supply and demand in macroeconomics the long run is the period when the general price level contractual wage rates and expectations adjust fully to the state of the economy this stands in contrast to the short run when these variables may not fully adjust long run models may also shift away from short run equilibrium in which supply and demand react to price levels with more flexibility firms can change production levels in response to expected economic profits for example a firm may implement change by increasing or decreasing the scale of production in response to profits or losses which may entail building a new plant or adding a production line the long run doesn t refer to a specific period of time rather it is specific to the firm industry or economic factor studied long run and the long run average cost lrac over the long run a firm will search for the production technology that allows it to produce the desired level of output at the lowest cost if a company is not producing at its lowest cost possible it may lose market share to competitors that are able to produce and sell at minimum cost the long run is associated with the long run average cost lrac the average cost of output feasible when all factors of production are variable the lrac curve is the curve along which a firm would minimize its cost per unit for each respective quantity of output in the long run the lrac curve is comprised of a group of short run average cost srac curves each of which represents one specific level of fixed costs the lrac curve will therefore be the least expensive average cost curve for any level of output as long as the lrac curve is declining then internal economies of scale are being exploited the long run average cost can also be called the long run average total cost economies of scale refer to the situation wherein as the quantity of output goes up the cost per unit goes down in effect economies of scale are the cost advantages that are achieved when there is an expansion of the size of production the cost advantages translate to improved efficiency in production which can give a business a competitive advantage in its industry of operations which in turn could translate to lower costs and higher profits for the business if lrac is falling when output is increasing then the firm is experiencing economies of scale when lrac eventually starts to rise then the firm experiences diseconomies of scale and if lrac is constant then the firm is experiencing constant returns to scale long run vs short runthe long run is the opposite of the short run this is an economic situation wherein firms want to meet a goal or target within a short period of time when demand for a product or service increases unlike the long run the short run involves at least one factor of production that is fixed while all the others are variable while the costs are fixed so there is no equilibrium between these factors this means there is no flexibility when it comes to the inputs or outputs since the costs are fixed while ordinary profits are typical of the long run the short run allows firms to realize economic or exceptional profits example of a long runhere s a hypothetical example to show how the long run works suppose a business has a one year lease this firm s long run is defined as any period longer than a year since it s not bound by the lease agreement after that period of time in the long run the amount of labor size of the factory and production processes can be altered if needed to suit the needs of the business or lease issuer 