Short-Run and Long-Run Costs
A manager's role is to use production effectively; accordingly, the manager must decide the exact amount of every input needed to produce an output.
Short Run
Long Run
The short run is the period of time in which production has fixed elements. For example, assume that money and amount of work are the basic inputs in production and the level of capital is fixed in the short run. A manager must determine the specific short-run input, which in this case is the necessary amount of labor. In the short-run production purpose, the amount of money is fixed instead of variable.
If K* is the fixed amount of money, the short-run production feature may be written as:
The company requires more labor in the short run to create additional output, because additional money is not an option.
In the short run, certain features of production are permanent, which limits the selection of inputs. For example, it will take several years for automobile manufacturers to build innovative assembly lines to manufacture hybrid cars and trucks. The amount of investment is usually fixed in the short run. "However, in the short run, automakers can adjust their use of inputs such as labor and steel; such inputs are called variable factors of production" (Baye, 2010, p. 157).
Baye, M. R. (2010). Managerial economics and business strategy (7th ed.). New York, NY: McGraw-Hill/Irwin.
The long run is the period of time a company needs to regulate all elements of production. For example, if a company takes five years to obtain extra equipment to produce capital, the projected long run is five years, and the short run would be fewer than five years.
