Long-Run

Long-run refers to the time frame during which the production factors are variable or changeable. There is enough time for adjustment, correction, or adaptation leading to the modification of production level, and as a result, there are no fixed production factors.

In the short run, businesses may make an exceptional profit, and as a result, new firms emerge. However, over a long period, many things can happen, such as a firm can enter the market, an existing firm can leave the market, or a firm's amount of capital or capital structure can vary. Subsequently, it reaches a stage where no firm wants to leave or enter the industry, and such a state is known as long run equilibrium.

• In the long run, all major production factors and costs are variable. In other words, the companies have enough time to expand their business and adapt to the changing environment.
• LRPC demonstrates that there is no long-term correlation between unemployment and inflation. The LRAC curve displays the lowest cost for generating each quantity of output when the fixed costs are not constant.
• The short run is different from it. Since, in the short run, a fixed factor of production exists. For example, capital is a fixed factor in the short run, or firms in an industry are fixed.

The long-run in economics indicates the period in which factors of production and costs are evaluated as variables. Fixed factors of production do not exist over a long period. It is this phase where producers strategize and put their plans into action. Fixed cost is commonly a short term attribute. In other words, long term fixed costs are not common. In a short period, firms do not change their scale of production, but it can happen over a long period leading to changes in the factors of production. 

Most organizations decide not just how many workers or infrastructure they need at any moment; they also think about how to set up a business organization, which also matters along with the production techniques they deploy. As a result, the long run is defined as the time frame required to change not just the workforce but also the size of the business, the way production is done, and the organization's design.

Some important concepts are the Long-Run Philips Curve (LRPC) and Long-Run Average Cost Curve or LRAC Curve. LRPC demonstrates that there is no long-term correlation between unemployment and inflation. On the other hand, when fixed costs can move, the LRAC curve displays the lowest cost for generating each quantity of output.

Let us look at an example to understand the concept better: 

The ABC company manufacturing motorcycles is trying to expand production in two years. In addition to the existing resources, new land, building, machinery, equipment, labor, and other resources are required to meet the new plan. Hence in two years, all these factors changed to contribute to the production as planned.

The major differences between the long and short run are as follows:

The significant benefits are as follows:

• In the long period, all factor costs are variable, and the company has complete control over changing its operational scale. Consequently, a company can vary its size and shape, construct new factories, and hire new employees in the long term or duration. The company's primary long-term objective is to reduce its overall average cost.
• Since all the production factors are variable, a firm can choose the best combination of inputs to reduce expenses. The long term is significant because it enables businesses to choose the optimal way to allocate their resources and determine the efficiency of their business operations.
• The average long-run cost, also known as LAC, gauges a company's long-term average cost of producing one unit of output. This measure is crucial for determining price and evaluating the business's competitive growth in the long term.
• Over time, businesses can modify the scale of their production by obtaining a  negative correlation between LRAC and output. That is, LRAC should decrease with an increase in output, enabling them to benefit from economies of scale. As a result, they can produce more goods at a lower cost per unit.

This has been a guide to Long Run and its meaning. We explain its example, benefits, and comparison with the short run. You may also find some useful articles here -

• Production Function
• Total Factor Productivity
• Mass Production