One of the contexts where short-run and long-run time periods are quite used is the theory of the firm. In this context, short-run is a time period within which a firm is not able to vary all its factors of production.
TIME IS an important parameter in the science of economics. It is used in various contexts and various ways. For example, time is used in static and dynamic analysis in the sense that in static analysis time is regarded as a constant, whereas in dynamic analysis it is assumed to be a variable. Time is also used in the theories of consumption, production and market systems. We will just look at the short-run and long-run aspects of this parameter. One of the contexts where short-run and long-run time periods are quite used is the theory of the firm. In this context, short-run is a time period within which a firm is not able to vary all its factors of production. There can, in fact, be several ‘short-runs’, of varying lengths, corresponding to the particular possibilities which the firm has of varying particular inputs. For example, in the very short-run, say one week or so the firm may not be able to change the amounts of any the inputs it uses, although it could perhaps increase labour inputs by increasing overtime working in period less than this. Over a month, however, it may be able to expand its labour force and increase the flow of raw materials, over a year, it may be able to increase all its inputs, except, perhaps, certain types of machinery, which perhaps take two years to obtain and install. Hence, the short-run for the firm will be anything less than two years. However, the firm may itself have it within its power to shorten the short-run by incurring higher costs. For example, the firm could rent the machinery, at a premium and so obtain it in less than two years; or the firm may pay more to shorten the delivery of time. This means that what is the short-run to a firm is as much an economic as technological question. More generally, the term short-run may be applied to any time period not long enough to allow the full effects of some changes to have operated. In other words, short-run in any context is that time period when all the possible adjustments that the economic agent desires fail to occur.
Long-run is strictly defined as the time period long enough for the firm to be able to vary the quantities of all its factors of production, rather than just some of them. For example, suppose that a firm uses labour, raw materials and machinery to make a particular product. Labour is hired on a weekly contract; raw materials take one month to arrive, from date of order, while plant and machinery takes two years to design, order, construct and install. The long-run for this firm is therefore two years, since over this time the firm can vary all its factors of production. The implication of the definition is that the long –run is not a fixed period of time for all the firms in all industries, but rather varies with the characteristics of an industry’s technology.
Thus the electricity supply industry requires five to six years to plan, construct and install new generating capacity and so its long run is five to six years. We must note that although it is normally assumed that the long run is determined by the time period required to extend plant capacity, this need not always be the case and the definition of the long-run is perfectly neutral as regards which input (or inputs) actually determines long-run. The importance of the long-run in the theory of the firm is that it is long enough to permit the firm to choose the most efficient combination of inputs to produce any given output. More generally, the long-run is often loosely taken as the period long enough for underlying economic factors causing tendencies to change to work themselves out fully. In other words, long-run in any context is that time period when all the possible adjustments that the economic agent desires occur. It was in this sense that Keynes used the term in his famous dictum: “In the long run we are all dead.”