Short Run Versus Long Run Production

Subject: Finance
Pages: 6
Words: 1597
Reading time:
6 min
Study level: PhD


Short run is the period of time when quantity of one input is at fixed level and other inputs have varied quantities. In the long run, there are varied quantities of all the inputs. There is no fixed time for separating short run from long run because; distinction varies between different industries. For example, if we increase demand for hockey sticks so that the company is prompted to increase the quantity of hockey sticks produced, more materials should be ordered immediately because it is a variable input.

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Extra labor will be needed which can be done by increasing number of shifts or existing workers being requested to work overtime. Additional equipments may not be implemented because an extra factory cannot be added within a short time, so this is the fixed input. In the short run period, production is increased by adding more labor and material but factory cannot be added but in long run, there are variable inputs that include factory space. (Magee, 2007 pp11-12)

Economics is concerned with the production, distribution and consumption of desired goods and services

Economics studies production, consumption and how goods and services are distributed. Economics is also a science that studies behavior of human beings in relation to ends and alternative uses of the scarce means of achieving the end. Scarcity is the limited supply of available resources that are used to satisfy needs and wants. Economic problem can not exist if there is no scarcity and the alternative uses of resources that are available. Economics studies economies of work and interaction between economic agents.

Microeconomics examines economic behavior of firms and individuals by looking at individual market interactions given government regulation and scarcity but macroeconomics address issues of inflation, unemployment, fiscal and monetary policies. The aggregate quantity demanded by buyers and quantity supplied by the sellers describe how the market is able to reach equilibrium because quantity and price responds to changes in the market overtime.

Production in Microeconomics deals with how inputs are converted into outputs through a process that utilizes resources in order to create commodity used for exchange. This involves manufacturing, shipping, storing and packaging. Production involves a process that occurs through space and time and is measured by output produced at a given period of time. Production processes have three aspects that include quantity of the produced commodity, the form of the created good and spatial or temporal distribution of commodity. Economic efficiency shows how a system is able to generate maximum desired output given a set of inputs and the available technology. For efficiency to be improved there should be generation of more output without change in inputs.

When the goods are produced, they should be distributed in order to reach all the consumers that need them. Goods can be sold from the manufacturers through wholesales to retailers until they reach the final consumers. The final consumers purchase goods and services they desire according to how the goods and services satisfy their needs and wants. Therefore, the producer should know the tastes and preferences of different consumers so that the goods and services produced are in the right quality that attracts potential customers all the time. (Magee, 2007 pp13-16)

Comparing and Contrasting the Phenomena of “Production and Cost in the Short Term” And “Production and Cost in the Long Term”

Comparing production and cost in short term

Both production and cost follow periods where there are extraordinary business investments, economic booms and productivity growth. Both of them also record sharp decline in value of stock and business investment. Gross domestic product declines and rate of unemployment increases and great depressions makes consumer spending to fall sharply. When the cost of production is high in the short run, the cost of goods produced also increases so that the revenue generated may not be less than the costs incurred during production.

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Production and costs consists of society rules, norms, conventions, values and habits that influence institutional arrangements such as the state, markets, networks and association that are dominant in the society. In turn, this has influence on interaction and structure of business system in the society with institutional environment consisting of industrial relations system and financial markets. State play role in system of production and influence the system rules so that customers may not be overcharged on the goods and services produced.

The prices for obtaining money borrowed for temporary use from a person who has it is expressed as the percentage of borrowed amount. Loans and repayment of loans entail complex security arrangements and periods of times that are considerable. Like the prices of advanced market economy, highly competitive markets determine interest rates by mutual supply adjustments and demand. Funds which can be given as loans are demanded by firms for investment purposes and households who need to purchase durable goods such as houses.

People care more about short term production goals than long term production goals because short term goals are closer to happening than the long term production goals. The incentives in the short term are given in form of bonuses basing on performance and the grading is in percentage scale that relates to efficiency of employees. (Shepherd, 2003 pp24-27)

Contrasting production and cost in short term

In the short term, production can be increased without increasing cost because, when there is need to increase production which requires more employees to be employed, instead of employing additional number of employees, the existing ones can work for overtime hours or increase the number of shifts. This will help increase production without increasing cost because; there will be no extra space that needs to be added by building more factories at an extra cost.

In short term production simulation is used in demand and capacity planning analysis in making informed decisions about control strategy and selection of capital equipment while in short term costs, simulation helps in reducing costs, manufacturing lead time and providing information for trial runs in order for performance to be increased and improve quality of products and increase productivity. (Lovell, 2004 pp22-27)

In short term production, there are effective scheduling rules and scheduling strategies such as shortest-time-first strategy and first-come-first-served strategy so that performance can follow sequencing rules depending on input rules and machines that are used in the plant while short term costs depends on willingness and ability of the customers to purchase the products at the price set so that the revenue generated can be enough to cater for cost of production and make profit. Manufacturing strategies have focus on trying to minimize production costs and improve output, yield, delivery time performance and machine utilization. (Fuss, 2005 pp20-23)

Comparing production and costs in the long term

The business system is involved in how firms relate with their customers, suppliers, owners and competitors. In both long term production and cost, the standard problem is about single system of production in the society and the way firms in single country define their relationship between customers, competitors, financers and employees and there is no dominant pattern of defining societies.

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The role played by financial markets in shaping distinctive system of production and cost is emphasized. The way of shaping financial markets in entire production system is extremely important. There is motivation of capitalist to earn profit and the way profit is pursued is shaped socially. Financial market structure influence time perspective of the capitalists and relationship between management and labor. In both long term production and costs, people are encouraged to work hard and to be loyal in their production through working hard with minimum supervision. (Coelli, 2005 pp13-20)

Contrasting production and costs in the long term

A firm in the long term is able to change scale of production because costs are not fixed which means the entire costs are variable. Shape of average cost curve in the long-run is determined by diseconomies and economies of scale. When there is experience of economies of scale, what results is operation in large scale leading to lower average costs and average cost curves in the long run slopes downward. Diseconomies of scale make average production costs be higher and cost curves in the long run slopes upward.

The profit underlies dynamics of production of the market economy while price that is expected must be able to exceed opportunity cost incurred in ensuring that the good is supplied. Production is affected by the changes in technology where there is need to use new improved technology in production and expanding the factories while the cost depend on other products that are produced by the firm and the cost in the firms which are in similar line of production.

Long run production function specifies how capital and labor are used technically efficiently in production of output without wasting the available resources. While cost function specify how resources are used efficiently in an economical manner where the firm prefers to use combination of inputs that have the least cost in producing a given level of output and the yield of cost function in the long run depends on prices of inputs which is a proxy for opportunity cost in measuring costs in units. (Lindley, 2007 pp29-34)


Shepherd R. (2003): Cost and production functions: Oxford University Press, pp. 24-27.

Fuss M. (2005): Production economics; Theory and applications: Berkeley education, pp. 20-23.

Coelli T. (2005): An introduction to efficiency and production analysis: Production review, pp. 13-18.

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Lindley J. (2007): Theory of production and cost: Journal of finance, pp. 29-34.

Lovell C. (2004): Stochastic production and cost: Journal of econometrics, pp. 22-27.

Magee J. (2007): production planning and inventory control: McGraw-Hill Education, pp. 11-16.