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Inputs and Outputs of Production

Short Run versus Long Run

In the short run, one or more inputs remain fixed; in the long run, the use of all inputs are variable.
In economics, the phrases "short run" and "long run" do not refer to particular lengths of time, such as three weeks or 10 years, as they do in accounting or other disciplines. They can be any length of calendar time. The short run is defined as the period in which the quantity of at least one factor of production is fixed and cannot be changed. A factor of production (also called a resource or input) is an item used during the making of goods and services. In manufacturing, capital (what is owned by the corporation that contributes to the manufacturing of products but is not sold directly; e.g., factories) is typically fixed, while inputs of labor and raw materials can be increased more quickly to make more of a product when sales are rising. In the short run, the firm combines its inputs in a ratio that lowers total cost to a minimum. If a factory making batteries experiences a large amount of growth, the firm would order more raw materials and hire new employees to make more batteries while keeping costs low. However, in a short-run scenario, the firm would not have the time or desire to spend the resources on a new factory.
A short run is the period in which the quantity of at least one production factor is fixed. During the short run, production factors such as buildings do not change. In a long run, all productive inputs are variable. More production factors change in the long run.
In the short run, no new firms enter the market and no existing firms exit. In many industries, for example, it may be possible to hire new workers and order more raw materials if there is an upturn in sales, but once existing manufacturing equipment is fully utilized, it may take a long time to order and commission new production machinery. Capital goods are usually fixed in the short term, though it is also possible for there to be limitations on the variable factors, such as a shortage of skilled labor or raw materials. Increasing some inputs while others stay fixed changes the ratio of inputs. For example, if a car factory increases the number of cars produced by adding overtime shifts while using the same number of body presses, the number of cars turned out by each body press will increase.

The long run is defined as the period in which all productive inputs are variable. In the long run, firms may enter or exit the industry; thus, output may be increased as factories are built by both existing producers and new entrants, and output may be decreased as existing firms close their factories. Assuming that a producer has already reached an efficient ratio of inputs in the initial period, this ratio may remain the same in the long run as every input fluctuates and can increase in the same proportions. During the long run, initially fixed inputs (typically capital goods), such as the size of buildings, can be changed. For example, say a manufacturer of energy-efficient light bulbs has experienced consistent growth over a period of time and its main competitor has gone out of business. The manufacturer would likely invest in creating an additional factory to increase production and increase revenues. The period described as "long run" and "short run" will vary according to the prevailing conditions in a specific industry at a particular place in a particular time frame.