Difference between long run and short-run


The statement on the long run and short-run is, in the short the firm will only increase the variable factors (cost) but not the fixed factors. In the long-run the firm increases the both fixed and variable factors (costs.

To understand above statement every person must learn and have exact idea about the long-run and the short-run terms in the business before going deep in the managerial economics or business economics. Below there is an example to understand the difference between the short and long-run concepts.

Short-run means that is not the period of 3 months, 6 months or one year.
Long-run means that is not the period above 1 or 2 years.

 

The inner meaning and concept of the long-run and short-run in the business point of view is different from what we think normally. Let us see the following case to have an understanding about these concepts.

Fixed factors (cost) = land & building and machinery
Variable factors (cost) l =raw materials (cloth), labour and capital (amount)}

DBR Garment Company had established long back and producing school uniforms from many years of time (long-run). It has invested on the fixed factors (land & building and machinery) and on the variable factors like {raw materials (cloth), labour and capital (amount)} for manufacturing of school uniforms. As company has good and constant demand in the market, it is producing 1, 00,000 units (dresses) every year. Gems educational institutions have given contract to DBR garments for one year to manufacture 20000 school uniforms for its school (short-run).  DBR garments have accepted to manufacture the school uniforms.

Here the contract to manufacture school uniforms for one year is the temporary demand for the company as it is clear. Generally, DBR will increase the raw material (cloth), labour and working capital only (variable factors) to produce the extra 20000 units from its regular production. Here the company will not increase the land & buildings and machinery (fixed factors), it is common logical thing (sense). Why because, as the increase in demand for school uniforms are temporary and investment on the fixed factors is costly and needs high investment. We can invest on fixed factors when there is permanent increase in demand (long-run).

DBR garments is producing extra 20000 school uniforms apart from is regular 1,00,000 units of production. For manufacturing of those, it has invested only on the variable factors. Here in this production process the fixed factor (cost) is absent. Hence, we can observe that firm gained extra profit (income) in the short-run.

 

Samrat.gunti. MBA LLB

Asst.Prof

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