The long run is a situation in economics wherein all factors of production and costs are variable. This period allows firms to operate and adjust all costs, adapting to market conditions. Not bound by short-term restrictions, firms can enter and leave the market during times of profitability and loss. In the long run, profits normalize, eliminating economic profits and preparing firms for inevitable competition. Even a monopoly in the short term must expect competition in the long run.
Key Takeaways
- The long run refers to a period where all production factors and costs are variable.
- Companies strive to find the most cost-effective production techniques over the long run.
- The LRAC curve helps firms minimize costs for different production levels.
- Exploitation of internal economies of scale occurs when the LRAC curve is declining.
The Dynamics of the Long Run
The long run lets manufacturers and producers be flexible with their production decisions. Characterized by variable inputs like capital, labor, materials, and equipment, businesses can expand or reduce production capacity. Entry or exit from industries is based on expected profits, assuming equilibrium between supply and demand cannot be maintained with fixed short-term schedules.
In macroeconomics, the long run denotes a period when general price levels, wage rates, and expectations fully adjust to the broader economic state. Unlike the short run’s rigidity, the long run displays a flexible reaction to price levels influenced by supply and demand.
When firms perceive potential economic profits, they modify production levels—building new facilities or adding production lines as necessary without being bound by short-term constraints.
Long Run and the Average Cost Curve (LRAC)
Over the long run, businesses search for the most cost-effective production technologies. A firm’s inability to produce at minimum cost may weaken its market share against competitors with lower production costs.
The long-run average cost (LRAC) curve represents the cheapest average cost for any production level over time. Comprised of multiple short-run cost curves, each associated with a specific fixed cost level, the LRAC curve declines as long as economies of scale are harnessed. When it starts to rise, companies experience diseconomies of scale.
Economies of Scale
Economies of scale refer to cost advantages when production volume increases, leading to lower per-unit costs. These cost savings boost efficiency, granting competitive advantages and potentially higher profits. A falling LRAC indicates economies of scale, whereas a rising LRAC signifies diseconomies of scale.
Long Run vs. Short Run
The long run contrasts sharply with the short run, where firms meet targets within a short timeframe with flexible or fixed inputs. This period allows companies to enjoy exceptional profits but lacks long-run flexibility.
| Long Run | Short Run | |
|---|---|---|
| Firms | Variable | Fixed |
| Labor | Variable | Fixed or variable |
| Capital/Costs | Variable | Fixed or variable |
| Flexibility | Time to adjust | No time to adjust |
| Profits | Ordinary profits | Exceptional profits |
Example of a Long Run
Consider a business with a one-year lease. The firm’s long run starts beyond the lease’s one-year term, offering flexibility in labor, capital, and production processes to adjust according to business needs.
Importance of the Long Run in Economics
The long run showcases firms operating with variable inputs and costs, highlighting their potential efficiency and responsiveness to market changes.
Factors Eliminating Economic Profits in the Long Run
Perfect competition typifies the long run, allowing easy market entry and exit that neutralizes profits, reflecting an infinite competitor model.
Benefits of the Long Run
The flexibility of variable costs permits operational adjustments, helping firms adapt production to optimize efficiency and minimize costs.
Conclusion
The long run in economics epitomizes flexible production factors and costs, offering companies the ability to adjust and remain competitive. This flexibility may avoid the exceptional profits seen in short-term scenarios, pointing towards a market balanced between competition and efficiency.
Related Terms: short run, factors of production, equilibrium, economies of scale, diseconomies of scale.
