Explain the concept of short-run and the long-run as associated with a firm.

 In economics the long run is a theoretical concept in which all markets are in equilibrium, and all prices and quantities have fully adjusted and are in equilibrium. The long run contrasts with the short run, in which there are some constraints and markets are not fully in equilibrium.

More specifically, in microeconomics there are no fixed factors of production in the long run, and there is enough time for adjustment so that there are no constraints preventing changing the output level by changing the capital stock or by entering or leaving an industry. This contrasts with the short run, where some factors are variable (dependent on the quantity produced) and others are fixed (paid once), constraining entry or exit from an industry. In macroeconomics, the long run is the period when the general price level, contractual wage rates, and expectations adjust fully to the state of the economy, in contrast to the short run when these variables may not fully adjust.

Since its origin, the "long period method" has been used to determine how production, distribution and accumulation take place within the economy. In a long run, firms change production levels in response to (expected) economic profits or losses, and the land, labour, capital goods and entrepreneurship vary to reach the minimum level of long-run average cost. In the simplified case of plant capacity as the only fixed factor, a generic firm can make these changes in the long run:

● enter an industry in response to (expected) profits

● leave an industry in response to losses

● increase its plant in response to profits

● decrease its plant in response to losses

The long run is associated with the long-run average cost (LRAC) curve in microeconomic models along which a firm would minimize its average cost (cost per unit) for each respective long-run quantity of output. Long-run marginal cost (LRMC) is the added cost of providing an additional unit of service or commodity from changing capacity level to reach the lowest cost associated with that extra output. LRMC equalling price is efficient as to resource allocation in the long run. The concept of long-run cost is also used in determining whether the firm will remain in the industry or shut down production there. In long-run equilibrium of an industry in which perfect competition prevails, the LRMC = LRAC at the minimum LRAC and associated output. The shape of the long-run marginal and average costs curves is influenced by the type of returns to scale.

The long run is a planning and implementation stage. Here a firm may decide that it needs to produce on a larger scale by building a new plant or adding a production line. The firm may decide that new technology should be incorporated into its production process. The firm thus considers all its long-run production options and selects the optimal combination of inputs and technology for its long-run purposes. The optimal combination of inputs is the least-cost combination of inputs for desired level of output when all inputs are variable. Once the decisions are made and implemented and production begins, the firm is operating in the short run with fixed and variable inputs. Another part of the development of planning what a firm may decide if it needs to produce more on a larger scale or not is Keynes theory that the level of employment(labor), oscillates over an average or intermediate period, the equilibrium. This level of fixed capital is determined by the effective demand of a good. Changes in the economy, based on capital, variable and fixed cost can be studied by comparing the long run equilibrium to before and after changes in the economy.

Short run - All production in real time occurs in the short run. In the short run, a profit-maximizing firm will:

● increase production if marginal cost is less than marginal revenue (added revenue per additional unit of output);

● decrease production if marginal cost is greater than marginal revenue;

● continue producing if average variable cost is less than price per unit, even if average total cost is greater than price;

● shut down if average variable cost is greater than price at each level of outputs.

The transition from the short run to the long run may be done by considering some short-run equilibrium that is also a long-run equilibrium as to supply and demand, then comparing that state against a new short-run and long-run equilibrium state from a change that disturbs equilibrium, say in the sales-tax rate, tracing out the short-run adjustment first, then the long-run adjustment. Each is an example of comparative statics. Alfred Marshall (1890) pioneered in comparative-static period analysis. He distinguished between the temporary or market period (with output fixed), the short period, and the long period.

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