Short Run Vs Long Run

Updated on April 5, 2024
Article byGayatri Ailani
Edited byGayatri Ailani
Reviewed byDheeraj Vaidya, CFA, FRM

Difference Between Short Run And Long Run

The difference between Short Run and Long Run lies in the flexibility that both options provide. While in the short run, the adjustments to production are limited because at least one factor of production, resource, or input is fixed, in the long run, all inputs are variable, offering entities the flexibility to make production adjustments.

These cycles are governed by their duration, which is not fixed. Short run decisions are restricted or limited by fixed factors, such as plant capacity, while long-run decisions involve adjusting inputs to optimize production. An industry’s characteristics, input flexibility, and market equilibrium norms define short and long runs in economics.

Key Takeaways

  • In economics, the short run refers to a period where at least one input is fixed, limiting a firm’s ability to adjust production fully. This fixed input could be physical capital, like machinery, or a contractual agreement, like a lease. 
  • The long run is a timeframe where all inputs are variable, allowing firms to adjust their production levels more freely.
  • The key difference between the short run and the long run lies in the flexibility of inputs. In the short run, at least one input remains fixed, constraining a firm’s ability to adjust production fully.
  • This fixed input could be a physical asset like machinery or a contractual commitment like a lease. Conversely, in the long run, inputs are variable, enabling firms to adjust their production levels more freely.

Comparative Table

The key differences between short runs and long runs are listed in the table below. 

Particulars Short RunLong Run 
Definition This refers to a period where at least one input is fixed, often involving constraints on adjustments.This refers to a period where all inputs can be varied, allowing for extensive adjustments to production.
Time FrameIt is typically short-term, ranging from a few months to a year.It has a long-term horizon, extending beyond a year, sometimes spanning several years or even decades.
AdjustmentsIt shows limited ability in terms of adjusting inputs due to fixed factors like machinery or facilities.Entities enjoy comprehensive flexibility with the option to adjust various inputs, including plant size, technology, and workforce composition.
Costs CoveredVariable costs like raw material, labor, etc., change as production capacities change while fixed costs like rent remain constant. Businesses can accommodate various cost changes in the long run through gradual adjustments. It must be noted that the degree of change may vary from cost to cost.  
Decision-makingIt emphasizes decisions within existing constraints, focusing on optimizing resource utilization.This involves strategic planning to optimize production processes, innovate, and adapt to changing market conditions.
ExamplesIncreasing labor hours to meet short-term demand spikes is an example of a short run in production.Investing in research and development to introduce new products is an example of a long run in production.

What Is Short Run?

In economics, a short run is a specific time frame where, in the near future, at least one input remains fixed while others exhibit variability. Unlike the long run, this period lacks a fixed duration and instead hinges on the unique circumstances of the entity or variable under examination, be it a firm, industry, or economic factor. Within this finite time frame, firms contend with the challenges posed by fixed inputs, such as machinery or infrastructure, which limit their ability to adjust production levels or respond to market fluctuations swiftly. 

Consequently, decisions made in the short run prioritize immediate optimization of resource utilization and navigation of existing constraints to achieve short-term objectives. This dynamic interplay between fixed and variable inputs offers economists a nuanced perspective on the complexities of economic behavior and decision-making within specific contexts, enabling tailored analyses that account for the diverse array of factors influencing short-run dynamics. Since short runs deal with immediate or current impact assessment, investigating specific events, trends, patterns, or issues in business or production becomes possible.

Short Run Example

Here is an example of a short run to enable readers to learn about the concept in detail. 

Suppose Susan runs a small bakery and is gearing up for the bustling holiday season. As orders pour in, the bakery’s oven capacity becomes a bottleneck. In the short run, she cannot instantly expand or upgrade the unit’s baking equipment. To accommodate the demand, she extends her operating hours, brings in extra pairs of hands to help, and ramps up ingredient purchases. 

Despite these efforts, the fixed oven capacity limits the bakery’s output. As a result, customers face longer waiting times, and the bakery struggles to fulfill orders, risking both customer satisfaction and potential revenue

In this scenario, the short run illustrates how fixed factors like oven capacity can restrict a business’s ability to meet sudden demand surges, underscoring the need for strategic planning to optimize resources and mitigate operational limitations.

What Is Long Run?

In economics, the long run consists of a period where all factors of production and costs are adjustable. This extended timeframe grants firms the freedom to modify varied aspects of their operations. Unlike the short run, where certain inputs are fixed, in the long run, businesses can fine-tune their strategies and adapt to changing market dynamics by altering production methods, technology, and workforce composition.

Another defining feature of the long run is the variability in the number of market producers. This fluid landscape enables firms to enter or exit the market in response to profitability shifts or economic losses. Moreover, while firms may enjoy monopolistic advantages in the short term, the long-run perspective anticipates the emergence of competition. Consequently, economic profits tend to diminish over time, aligning with the notion of ordinary profits prevailing in the long-run equilibrium. It might be prudent for companies to view factors affecting the long-run plan in light of short-run decisions, as this might give them a holistic view of the business.

Long Run Example

Let us study an example of a long run to understand the concept better. 

Suppose a technology startup, TechSwift Inc., is operating in a rapidly evolving market. In the long run, the company has the flexibility to adjust all aspects of its operations, from production methods to research and development investments. Initially, as a new entrant, TechSwift Inc. enjoys some degree of market dominance, capitalizing on innovative products and unique offerings. However, over time, competitors emerge, drawn by the tech industry’s promising prospects.

In response, the startup strategically allocates resources to enhance its competitive edge, investing in cutting-edge technologies, expanding its product line, and strengthening its market presence through aggressive marketing campaigns. Additionally, the firm focuses on building robust partnerships and cultivating a loyal customer base to sustain its growth trajectory.

As the market matures, the once-dominant startup faces intensified competition, leading to pricing pressures and diminishing profit margins. Despite these challenges, the company’s ability to adapt and innovate enables it to maintain a foothold in the industry. In this case, the long run illustrates how firms navigate evolving market landscapes, continually adjusting their strategies to sustain growth and competitiveness amidst changing industry dynamics.

This has been a guide to Difference Between Short Run & Long Run. We explain them along with a comparative table, and examples. You may also have a look at the following articles –

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