What is the difference between "short run"
production, and "long run" production?
Well, by definition, the "short run" is the
time period in which "at least one resource
is fixed."
Well, how long is that?
The answer, of course, is "it depends."
Let's say you have decided to open a restaurant.
You've done your homework, so you know that
most new restaurants fail within the first
year.
Because you are cautious, you decide to sign
a lease for just six months, so that you can
see how things go.
In this case, the short run -- the period
in which at least one resource is fixed -- is
six months.
If you had been more optimistic (or less risk-averse),
maybe you would have committed to a longer
lease -- say, two years.
In this case, the short run would be two years.
Once the lease is up, you could decide to
keep the space, or expand, or downsize, so
that the capital (the building) would now
be changeable -- once all resources are changeable,
you are dealing with the long run.
Generally, resources such as labor and supplies
are more likely to be changeable, whereas
large, durable capital items (such as your
storefront or other building) tend to be fixed
for extended periods of time.
Keep this in mind as we move forward to consider
production decisions.
NEXT TIME: Economic costs vs. accounting costs.
