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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.[1][2]

History

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The differentiation between long-run and short-run economic models did not come into practice until 1890, with Alfred Marshall's publication of his work Principles of Economics. However, there is no hard and fast definition as to what is classified as "long" or "short" and mostly relies on the economic perspective being taken. Marshall's original introduction of long-run and short-run economics reflected the 'long-period method' that was a common analysis used by classical political economists. However, early in the 1930s, dissatisfaction with a variety of the conclusions of Marshall's original theory led to methods of analysis and introduction of equilibrium notions. Classical political economists, neoclassical economists, Keynesian economists all have slightly different interpretations and explanations as to how short-run and long-run equilibriums are defined, reached, and what factors influence them.[3]

Economic theory has employed the "long-period technique" of analysis to examine how production, distribution, and accumulation take place within a market economy ever since its first appearance in the writings of the 18th-century. According to classical political economists like Adam Smith, the "natural" or "average" rates of salaries, profits, and rent tend to become more uniform as a result of competition. Consequently, "market" prices, or observed prices, tend to gravitate toward their "natural" levels. In this case, according to the classical political economists, the divergence between a commodity's provide example of a commodity "market" and "natural" price is established by a disparity between the amount provided by producers and the "effective demand" for it. This gap between the "market" and "natural" price indicates that the commodity will likely experience windfall profits or losses. When the supply and the "effective demand" are in sync, the "market" price would end up corresponding to the "natural" price. The profit rate earned in that sector is the same as the profit rate earned across the whole economy, and it is stated that the conditions of equilibrium will prevail. Therefore, according to this specific approach, supply and demand changes only explain are indicative of the deviation that occur of "market" from "natural" prices.[4]

The "long-period technique" was once again implemented by the economists who later on developed the neoclassical theory. Unlike the classical political economics theory, the neoclassical economics theory set distribution, pricing, and output all at the same time. All of these variables' "natural" or "equilibrium" values relied heavily on technological conditions of production and were consequently linked to the "attainment of a uniform rate of profits in the economy."[5]

Long run

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Since its origin, the "long period method" has been used to determine how production, distribution and accumulation take place within the economy. In the 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. A generic firm can make the following 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
  • Add or reduce employees in response to profits/losses and firm requirements

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 product 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.[6][7] 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.[8] The optimal combination of inputs is the least-cost combination of inputs for desired level of output when all inputs are variable.[7] Once the decisions are made and implemented and production begins, the firm is operating in the short-run with fixed and variable inputs.[7][9] 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.

In the long-run, consumers are better equipped to forecast their consumption preferences. Daniel Kahneman claims consumers then have ample time to make thought-out, planned, and rational decisions, in what Kahneman refers to as the System 2 mode of thinking.[10] When consumers act this way, their utility and satisfaction improves.[citation needed]

Short run

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All production in real time occurs in the short-run. The decisions made by businesses tend to be focused on operational aspects, which is defined as specific decisions made to manage the day to day activities in the company. Businesses are limited by many things including staff, facilities, skill-sets, and technology. Hence, decisions reflect ways to achieve maximum output given these restrictions. In the short-run, increases and decreases in variable factors are the only things that can affect the output produced by firms.[11] They could change things such as labour and raw materials. They are not able to change fixed factors such as buildings, rent, and know-how since they are in the early stages of production.

Firms make decisions with respect to costs. In the short-run, the variation in output, given the current level of personnel and equipment, determines the costs along with fixed factors that are unavoidable in the early stages of the firm.[12] Therefore, costs are both fixed and variable. A standard way of viewing these costs is per unit, or the average. Economists tend to analyse three costs in the short-run: average fixed costs, average variable costs, and average total costs, with respect to marginal costs.

The average fixed cost curve is a decreasing function because the level of fixed costs remains constant as the output produced increases. Both the average variable cost and average total cost curves initially decrease, then start to increase. The more variable costs used to increase production (and hence more total costs since TC=FC+VC), the more output generated. Marginal costs are the cost of producing one more unit of output. It is an increasing function due to the law of diminishing returns, which explains that is it more costly (in terms of labour and equipment) to produce more output.

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 decisions of the firm impacts consumer decisions. Since there are constraints in the short-run, consumers must make decisions in quick time with respect to their current level of wealth and level of knowledge.[13] This is similar to Kahneman's System 1 style of thinking where decisions made are fast, intuitively, and impulsively.[10] In this time frame, consumers may act irrationally and use biases to make decisions. A common bias is the use short-cuts known as heuristics. Due to differences in various situations and environments, heuristics that may be useful in one area may not be useful in other areas and lead to sub-optimal decision making and errors. Thus, it becomes difficult for businesses, who are tasked to forecast the demand curves of consumers, to make their own ideal decisions.

Transition from short run to long run

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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.[14] He distinguished between the temporary or market period (with output fixed), the short period, and the long period. "Classic" contemporary graphical and formal treatments include those of Jacob Viner (1931),[15] John Hicks (1939),[16] and Paul Samuelson (1947).[17][18] The law is related to a positive slope of the short-run marginal-cost curve.[19]

Macroeconomic usages

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The usage of long-run and short-run in macroeconomics differs somewhat from the above microeconomic usage. John Maynard Keynes in 1936 emphasized fundamental factors of a market economy that might result in prolonged periods away from full-employment.[20][21] In later macroeconomic usage, the long-run is the period in which the price level for the overall economy is completely flexible as to shifts in aggregate demand and aggregate supply. In addition there is full mobility of labor and capital between sectors of the economy and full capital mobility between nations. In the short-run none of these conditions need fully hold. The price level is sticky or fixed in response to changes in aggregate demand or supply, capital is not fully mobile between sectors, and capital is not fully mobile across countries due to interest rate differences among countries and fixed exchange rates.[22]

A famous critique of neglecting short-run analysis was by Keynes, who wrote that "In the long run, we are all dead", referring to the long-run proposition of the quantity theory of money, for example, a doubling of the money supply doubling the price level.[23]

Different usages and notion

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The short-period equilibria has been sometimes applied[by whom?] to post-Walrasian equilibria. On other occasions, Keynes's notion of equilibrium was mostly treated as temporary equilibrium. There were great differences between the post-Walras model, Marshall model, and Keynes model[citation needed]. The post-Walras model gives all capital goods, including mobile capital goods. In Marshall's short-term analysis, only the fixed factories of a single industry are a figure. Finally, in Keynes's work, only the fixed capital goods of the entire economy are given. The term 'long-period equilibrium' was often used[by whom?] to refer to post-Walrasian intertemporal equilibria with futures markets, sequences of temporary equilibria, and steady-growth equilibria.

See also

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  • Cost curve (including long-run and short-run cost curves)

Notes

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References

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Revisions and contributorsEdit on WikipediaRead on Wikipedia

Long run and short run

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In , the short run and long run are key concepts that distinguish time periods based on the flexibility of production inputs and economic adjustments. The short run refers to a period during which at least one —often capital—is fixed and cannot be altered, limiting a firm's ability to fully optimize its production process. In contrast, the long run is a timeframe in which all are variable, allowing firms to adjust their scale of operations, enter or exit markets, and achieve minimum efficient production levels. These distinctions are not defined by fixed calendar durations but vary by industry and firm specifics; for example, a may consider one year as the long run, while a large may consider five years as the short run. In microeconomic analysis, the short run focuses on scenarios where firms face constraints on inputs like plant size or machinery, leading to concepts such as diminishing marginal returns as variable inputs like labor are increased against fixed ones. This results in upward-sloping short-run supply curves and higher average costs due to inflexibility. Conversely, the long run enables full adjustment, where firms can minimize costs through optimal input combinations, often exhibiting economies or as output expands. Long-run equilibrium in competitive markets typically features zero economic profits, as free entry and exit drive prices to the minimum average . In , the short run and long run similarly differentiate adjustment speeds but emphasize price and wage rigidities rather than input fixity. The short run is characterized by sticky prices and wages, causing output and to fluctuate with demand shocks, as seen in business cycles where the may deviate from . In the long run, however, prices and wages fully adjust, returning the to its potential output level at the natural rate of unemployment, with vertical long-run reflecting full resource utilization. This framework underpins models like the aggregate demand- (AD-AS) model, where short-run deviations inform policy responses to recessions, while long-run growth depends on factors like and .

Fundamental Concepts

Short Run

In , the short run refers to a time period during which a firm cannot fully adjust all , with at least one input—typically capital, such as plant size or equipment—remaining fixed, while other inputs like labor can vary. This constraint arises because adjusting fixed factors requires significant time and investment, limiting the firm's ability to scale operations instantaneously. The concept originates from Alfred Marshall's analysis in Principles of Economics, where he described the short period as one in which supply adjustments are confined to varying labor and materials without altering the scale of the production apparatus. Key characteristics of the short run include a focus on operational decisions, such as optimizing output with existing capacity, where firms may earn economic profits or incur losses without immediate entry or exit of competitors altering . The short-run average total cost (SRATC) curve typically exhibits a U-shape, reflecting initial economies from spreading fixed costs over more units, followed by rising costs due to the of diminishing marginal returns as variable inputs are increased against fixed capacity. For instance, (TC) in the short run is given by TC = FC + VC, where FC denotes fixed costs (unchanged regardless of output) and VC denotes variable costs (dependent on output level); (MC), defined as MC=ΔTCΔQ\mathrm{MC} = \frac{\Delta \mathrm{TC}}{\Delta \mathrm{Q}}, initially declines but eventually rises as diminishing returns set in. A representative example is a facing increased : it can hire additional workers to boost output using its current facility, but cannot expand the building or install new machinery in the short run, leading to potential inefficiencies from . This framework enables the analysis of short-run supply curves, which under fixed capacity represent the portion of the curve above average , illustrating how firms respond to price changes with constrained production possibilities.

Long Run

In , the long run is defined as a time frame sufficiently long for all inputs to production to be variable, including capital and other fixed factors, allowing firms to fully adjust their scale of operations. This period enables market entry and exit by firms, leading to zero economic profits in perfectly competitive markets as new entrants erode supernormal profits until price equals the minimum long-run . A key characteristic of the long run is that firms can achieve the minimum point on the long-run (LRAC) , which represents the lowest of production at optimal scale. The LRAC is the lower envelope of all possible short-run average total cost (SRATC) curves, each corresponding to a different fixed size, such that the LRAC traces the lowest-cost path across varying output levels. The shape of the LRAC reflects where average costs decline as output increases due to specialization and indivisibilities, followed by constant returns, and then where costs rise from managerial complexities. For instance, a firm might expand its plant size in the long run to double output while less than doubling costs, thereby lowering average costs through . The LRAC is calculated as the long-run divided by output quantity, LRAC=LRTCQLRAC = \frac{LRTC}{Q}, and the long-run marginal cost (LRMC) curve intersects the LRAC at its minimum point, indicating the efficient scale where equals average cost. In under constant costs, the long-run industry supply curve is horizontal at the minimum LRAC, as entry and exit adjust the number of firms to maintain price at this level regardless of output demanded.

Historical Development

Classical and Neoclassical Origins

The classical period of economic thought, spanning the late 18th to early , laid the foundational concepts for distinguishing long-run analysis from shorter-term market fluctuations, though without explicit temporal demarcations. Economists during this era emphasized static long-run equilibrium as the primary lens for understanding economic phenomena, focusing on natural or normal prices that emerge when markets fully adjust over extended periods. This approach contrasted with mercantilist concerns over short-term trade balances, prioritizing instead the structural determinants of wealth distribution, production, and growth in a . Adam Smith introduced the long-period method in his 1776 An Inquiry into the Nature and Causes of the Wealth of Nations, conceptualizing natural prices as the central point toward which market prices gravitate through competition and supply adjustments over time. Natural prices, comprising wages, profits, and rents under normal conditions, represent long-run equilibrium where effectual demand aligns with supply, allowing the economy to stabilize without persistent surpluses or shortages. Smith's analysis tied early notions of fixity to agriculture, where land's limited availability influences production costs and prices in the long run, prefiguring modern ideas of fixed factors. This gravitational process underscores the self-regulating market, with deviations viewed as temporary before full adjustment. David Ricardo extended this framework in his 1817 On the Principles of Political Economy and Taxation, centering long-run equilibrium on as an inherently fixed and scarce resource. Ricardo's theory posits that as grows, cultivation shifts to less fertile lands, leading to that elevate rents on superior plots while compressing profits and stabilizing wages at subsistence levels. This static long-run analysis highlights 's immobility as a constraint on output, driving income redistribution toward landowners in equilibrium, with short-term variations subordinated to these structural tendencies rooted in agricultural realities. John Stuart Mill, in his 1848 Principles of Political Economy, further refined the classical approach by separating short-run disturbances—such as temporary supply shocks or monetary fluctuations—from long-run tendencies toward equilibrium. Mill viewed short-run perturbations as disruptions to fixed contracts or market balances that resolve over time, restoring the economy to a state governed by production costs and natural laws of distribution. His emphasis on long-run static analysis maintained the classical focus on agriculture and land fixity, where enduring factors like soil fertility dictate equilibrium prices and growth limits, distinguishing transient effects from permanent structural outcomes. The transition to in the mid-19th century began to imply formal distinctions in time horizons, particularly through partial equilibrium models that captured short-run market adjustments. Antoine-Augustin Cournot's 1838 Researches into the Mathematical Principles of the Theory of Wealth modeled duopoly scenarios where firms adjust outputs assuming rivals' fixed strategies, suggesting short-run dynamics of price and quantity competition before broader equilibrium. This mathematical approach highlighted immediate market responses, contrasting the classical long-run stasis. Léon Walras marked a pivotal neoclassical shift with his 1874 Elements of Pure Economics, conceiving general equilibrium as an instantaneous, static state where all markets clear simultaneously through tâtonnement price adjustments, without temporal sequencing. Unlike partial equilibrium views that isolate short-run adjustments in specific markets, Walras's holistic framework treats the economy as a synchronized system, where interdependencies resolve instantly to a long-run-like balance, though critiqued for overlooking dynamic paths. This instantaneous equilibrium contrasted sharply with classical partial analyses, setting the stage for later refinements in time-based distinctions. Early concepts of the long and short run were inextricably linked to , where land's fixity as an original factor of production—immobile and inelastic—shaped classical and early neoclassical understandings of equilibrium. Superior lands yielded differential rents in the long run, while short-term adjustments involved labor and capital mobility around this fixed base, influencing prices and distribution without altering land's . These origins evolved toward Alfred Marshall's explicit temporal formalization in 1890, bridging classical statics with dynamic market processes.

Marshallian Formalization

formalized the concepts of the short run and long run in his seminal work Principles of Economics, first published in 1890 and revised through eight editions until 1920. In this text, he defined the short run (or short period) as the timeframe during which the stock of capital equipment, such as plant and machinery, remains fixed, allowing producers to adjust output primarily through variations in labor and other variable inputs. Conversely, the long run (or long period) represents a sufficiently extended duration for all , including capital, to be fully adjustable in response to changes in demand, enabling the economy to reach a state of normal equilibrium where supply aligns with long-term cost structures. This distinction was integral to Marshall's framework of partial equilibrium analysis, which examines isolated markets while holding other economic variables constant to isolate the effects of time on price determination. Marshall illustrated the interplay of supply and demand using the famous "scissors" analogy, likening the two forces to the blades of a pair of that together determine : "We might as reasonably dispute whether it is the upper or the under blade of a pair of that cuts a piece of paper, as whether value is governed by or of production." He emphasized time as a critical factor in economic adjustments, noting that the relevant period varies by context—"what is a short period for one problem, is a long period for another"—and that transitions between periods occur gradually as markets adapt to new conditions. Influenced by biological principles, Marshall drew analogies from evolutionary processes to describe economic adjustments as organic and incremental, rather than instantaneous, reflecting his view that should aspire toward "economic biology" to capture the complexity of real-world dynamics. Marshall's approach highlighted the variability of the long run, cautioning that it encompasses ever-extending horizons where full adjustments may approach but never fully realize a static state, akin to "the remotest future." This formalization built on classical foundations but introduced explicit temporal dimensions, shifting economic analysis toward dynamic processes. However, his emphasis on long-run equilibrium drew later critique from , who in argued that such a focus provided "a misleading guide to current affairs," prioritizing short-run fluctuations in macroeconomic policy.

Microeconomic Applications

Short-Run Production and Costs

In the short run, a firm's production is constrained by at least one fixed input, typically capital KK, which cannot be adjusted quickly, while variable inputs like labor LL can be varied to influence output. The production function is thus expressed as Q=f(L,K)Q = f(L, K), where output QQ depends on labor given fixed capital. This setup reflects real-world scenarios where firms operate with existing plant and equipment, adjusting only labor or materials to meet demand. The law of diminishing marginal returns governs short-run production: as additional units of the variable input are added to , the MPL=ΔQΔLMP_L = \frac{\Delta Q}{\Delta L} eventually decreases, leading to progressively smaller increments in output. First articulated in agricultural contexts and extended to by , this arises because fixed factors become overburdened, reducing — for instance, adding more workers to a fixed space eventually causes congestion and coordination issues. Consequently, the of production rises as output increases beyond a certain point, since each additional unit requires disproportionately more variable inputs to achieve smaller output gains. To illustrate, consider a firm with producing widgets. With 1 worker, output is 10 units (MPL=10MP_L = 10); adding a second raises output to 18 (MPL=8MP_L = 8); a third to 24 (MPL=6MP_L = 6); and a fourth to 28 (MPL=4MP_L = 4). Here, output more than doubles from 10 to 28 with labor quadrupling, but the increments diminish, reflecting rising costs per additional unit if wages are constant./08:_Production_and_Cost/8.01:_Production_Choices_and_Costs:_The_Short_Run) Short-run costs decompose into s (e.g., rent on capital, invariant with output) and variable costs (e.g., wages, scaling with production). Average AFC=FCQAFC = \frac{FC}{Q} declines continuously as output rises, spreading fixed expenses over more units, while average variable cost AVC=VCQAVC = \frac{VC}{Q} typically falls initially due to specialization but then rises from . Short-run average total cost is thus SRATC=AFC+AVCSRATC = AFC + AVC, forming a U-shaped . The shutdown point occurs where equals the minimum AVCAVC; below this, the firm minimizes losses by halting production, as revenues fail to cover variable costs, though s persist regardless. In imperfectly competitive markets like monopoly or , firms maximize short-run profits by producing where equals (MR=MCMR = MC), potentially earning positive economic profits due to and entry barriers. This contrasts with , where zero profits prevail in equilibrium, but allows short-run supernormal returns until long-run adjustments erode them.

Long-Run Production and Costs

In the long run, all inputs to production are variable, allowing firms to fully adjust their scale of operations to minimize costs and optimize output levels in response to market conditions. This contrasts with short-run constraints where at least one input is fixed, serving as an for long-run planning. Firms make decisions on plant size, , and input mixes to achieve cost efficiency, particularly in competitive markets where entry and exit influence industry structure. Long-run production is analyzed using isoquants, which represent combinations of inputs (such as labor and capital) that yield the same output level, and isocost lines, which show combinations affordable at given input prices. The optimal input combination occurs where an isoquant is tangent to the lowest possible isocost line, minimizing the cost of producing a target output. This tangency condition ensures efficient resource allocation by balancing the marginal rate of technical substitution (MRTS)—the rate at which one input can substitute for another while keeping output constant—with the ratio of input prices. Returns to scale describe how output changes when all inputs are scaled proportionally. Increasing occur when output increases more than proportionally (e.g., doubling inputs more than doubles output), often due to specialization or indivisibilities; constant returns to scale when output scales exactly proportionally; and decreasing returns to scale when output increases less than proportionally, possibly from management complexities. These returns influence the shape of the long-run (LRAC) curve, with increasing returns leading to declining LRAC and decreasing returns to rising LRAC. The LRAC curve is derived as the lower of multiple short-run average (SRATC) curves, each corresponding to a different fixed input level (e.g., size), representing the minimum achievable at each output level by choosing the optimal scale. The (MES) is the output level at which the LRAC reaches its lowest point, beyond which further expansion does not reduce average costs and may increase them under decreasing returns. For instance, in industries like automobiles, MES is large relative to market demand, favoring fewer, larger firms. The expansion path traces the locus of these optimal tangency points across increasing output levels, given fixed input prices, and is defined mathematically where the MRTS equals the input price ratio: MRTSL,K=MPLMPK=wr\text{MRTS}_{L,K} = \frac{MP_L}{MP_K} = \frac{w}{r} Here, MPLMP_L and MPKMP_K are the marginal products of labor (LL) and capital (KK), ww is the wage rate, and rr is the rental rate of capital; this path is typically upward-sloping under standard production functions exhibiting diminishing marginal returns to individual inputs. In competitive markets, firms exit if the market falls below the minimum LRAC, as they cannot cover total costs even at optimal scale, leading to industry contraction until rises. Conversely, entry occurs when exceeds minimum LRAC, expanding supply. In long-run equilibrium, free entry and exit drive economic profits to zero, with industry supply occurring at the minimum LRAC, ensuring allocative and .

Transition from Short Run to Long Run

Adjustment Mechanisms

Adjustment mechanisms in refer to the dynamic processes through which firms and markets transition from short-run disequilibria, characterized by fixed inputs and temporary imbalances, to long-run equilibrium where all factors are variable and optimized. In the short run, firms face constraints such as stock, leading to higher costs and limited output responses to shocks like changes in demand or input prices; over time, these constraints ease as firms in new capital equipment or expand facilities, effectively shifting the short-run total cost (SRATC) curve downward to achieve lower per-unit costs at higher output levels. This process allows firms to scale production efficiently, reducing costs as fixed factors become more fully utilized. Parallel to capital adjustments, labor markets facilitate reallocation through worker mobility and skill enhancement via training programs, enabling inputs to shift from less productive to more productive uses in response to economic changes. Greater labor mobility permits workers to relocate across sectors or regions, while training initiatives upskill employees to meet evolving demands, thereby smoothing the transition to long-run by minimizing and matching labor to optimal production needs. These mechanisms collectively restore balance, as firms adjust input mixes to minimize costs and maximize output in line with market signals. A classic example of these processes occurs when an increase in product disrupts short-run equilibrium: prices rise initially due to constrained supply from fixed capacities, generating economic profits that attract new entrants or expansions by existing firms, ultimately increasing market supply and restoring prices to competitive levels through long-run capacity expansion. In competitive markets, this entry of new firms erodes short-run profits, driving the industry toward zero economic profit equilibrium where equals minimum long-run total cost. The duration of these adjustments, or time lags, varies significantly by industry, reflecting differences in and flexibility; for instance, retail sectors often adjust within months through rapid and changes, whereas may require years for machinery installation and reconfiguration. Expectations play a crucial role in accelerating these transitions, as forward-looking agents—firms anticipating sustained or workers expecting adjustments—initiate investments or relocations sooner, shortening lags and mitigating disequilibria more rapidly than backward-looking behaviors would allow. Alfred Marshall's concept of underscores a unique aspect of these mechanisms: , where short-run shocks influence long-run outcomes through incremental adjustments rather than instantaneous shifts, as initial responses to disturbances embed persistent effects on and market structures. Microeconomic curves serve as analytical tools for modeling these SRATC shifts during transitions.

Comparative Statics Analysis

Comparative statics analysis is a methodological approach in that examines the differences between two or more equilibrium states resulting from an exogenous change in parameters, while holding all other factors constant to isolate the direct effects of that change. This technique focuses on the end states rather than the transitional dynamics, allowing economists to predict how variables like prices and quantities adjust in response to shocks such as policy interventions or technological shifts. By employing the assumption—meaning "all else equal"— traces the impacts of parameter variations in a controlled manner, avoiding complications from time paths or interdependent adjustments. The method builds on Alfred Marshall's framework for partial equilibrium analysis, which analyzes shifts in individual markets while treating other markets as fixed. It was further developed in Jacob Viner's 1931 examination of short-run and long-run supply curves, where he graphically illustrated how cost structures influence equilibrium outcomes under varying assumptions about factor fixity. John R. Hicks advanced this in his 1939 work Value and Capital, introducing stability conditions to ensure the direction of adjustments between equilibria. Paul A. Samuelson provided a rigorous mathematical formalization in his 1947 book Foundations of Economic Analysis, deriving qualitative predictions from using differential equations and correspondence principles that link static changes to underlying dynamic stability. A classic application of comparative statics in the context of short-run and long-run equilibria is the analysis of tax incidence following the imposition of a per-unit excise tax on producers in a competitive market. In the short run, with the number of firms fixed, the supply curve shifts vertically upward by the full amount of the tax, resulting in a new equilibrium where the price rises by an amount less than the tax—depending on the relative elasticities of supply and demand—thus sharing the burden between consumers (via higher prices) and producers (via lower net receipts). For instance, if demand is relatively elastic, consumers bear a smaller share, while inelastic demand shifts more of the burden to them. In the long run, however, free entry and exit adjust the number of firms, making supply more elastic; in a constant-cost industry, the long-run supply curve shifts upward by the full tax amount, leading to the entire incidence falling on producers as the price rises by the tax, with output returning to its pre-tax level but profits normalized to zero. This contrast highlights how time horizons alter equilibrium outcomes, with short-run fixities limiting adjustments compared to long-run flexibility. To visualize these shifts, consider a supply-demand : the initial intersection at P0P_0 and Q0Q_0 moves, post-tax, to a short-run point where the price wedge equals the but is partially passed on, and further to a long-run point where the full is embedded in costs without output loss. Such , rooted in Marshallian partial equilibrium, underscore the method's utility in predicting directional changes without specifying adjustment speeds.

Macroeconomic Usages

Short-Run Macroeconomic Dynamics

In short-run macroeconomic dynamics, nominal rigidities in wages and prices prevent the economy from immediately adjusting to equilibrium, leading to output gaps where actual output deviates from potential output. These rigidities arise because wages and prices are sticky in the short run due to contracts, menu costs, and adjustment lags, causing and fluctuations driven by changes rather than supply-side factors alone. For instance, during a , fixed nominal wages can result in that are too high, reducing labor demand and creating as firms cut production rather than hire at lower rates. The model illustrates how demand-driven fluctuations occur in the short run, where equilibrium output is determined by the intersection of the aggregate expenditure line and the 45-degree line representing planned output equaling expenditure. In this framework, is given by Y=C+I+G+NXY = C + I + G + NX, with consumption C=c0+c1(Y−T)C = c_0 + c_1 (Y - T), where c1c_1 is the , leading to a multiplier effect that amplifies changes in autonomous spending. emphasized this short-run focus in his General Theory, arguing that economies can remain stuck in equilibria without automatic correction, famously stating, "In the long run we are all dead," to underscore the urgency of addressing immediate demand deficiencies over waiting for long-term adjustments. A key example of short-run dynamics is the trade-off, which posits an inverse relationship between and due to sticky nominal : as demand increases, firms raise prices faster than wages, temporarily lowering and boosting , but at the cost of higher . Empirically, A.W. Phillips documented this using data from 1861–1957, showing wage declining as rose. The short-run (SRAS) curve captures this stickiness, sloping upward as output responds to price changes: Y=Yˉ+α(P−Pe)Y = \bar{Y} + \alpha (P - P^e) where Yˉ\bar{Y} is potential output, PeP^e expected prices, and α>0\alpha > 0 reflects the degree of price stickiness; unlike the vertical long-run curve, this allows temporary output gaps from demand shocks. Microeconomic foundations, such as fixed nominal input prices at the firm level, underpin these aggregate rigidities. The IS-LM model further analyzes short-run effects of monetary and fiscal policy under these conditions, with the IS curve representing goods market equilibrium (Y=C(Y−T)+I(r)+GY = C(Y - T) + I(r) + G) and the LM curve money market equilibrium (M/P=L(Y,r)M/P = L(Y, r)), where interest rate rr adjusts to balance saving and investment, and money demand depends on output and rates. Shifts in policy, like expansionary fiscal spending moving IS rightward, raise output and interest rates, closing output gaps but potentially crowding out investment; monetary easing shifts LM rightward, lowering rates and boosting demand. This framework highlights policy's role in stabilizing short-run fluctuations amid rigidities.

Long-Run Macroeconomic Equilibrium

In long-run macroeconomic equilibrium, prices and wages are fully flexible, allowing the to achieve full utilization of resources and produce at its potential output level. This equilibrium reflects a state where and supply intersect at the 's sustainable capacity, independent of nominal disturbances. Central to this concept is the , which posits that money is neutral in the long run, meaning changes in the money supply affect only nominal variables like prices and not real variables such as output or ; instead, real economic outcomes are determined by supply-side factors including , labor supply, and capital stock. A key feature of long-run equilibrium is the natural rate of , defined as the unemployment rate consistent with stable and full employment of labor resources, arising from frictional and structural factors rather than cyclical deficiencies. This concept was independently developed by and , who argued that attempts to push unemployment below this rate through expansionary policies would only accelerate without sustainable real gains. Their work critiqued the perceived trade-off in the short-run , demonstrating that in the long run, the Phillips curve is vertical at the natural rate, implying no long-term inverse relationship between and . The Solow growth model provides a foundational example of long-run equilibrium through its analysis of , where economies converge to a steady-state level of output determined by savings rates, , and technological progress, beyond which growth is driven solely by exogenous technological improvements rather than further capital deepening. In this framework, long-run (LRAS) is represented as a vertical line at potential GDP Y∗Y^*, the maximum sustainable output, given by the Y∗=f(technology,labor,capital),Y^* = f(\text{technology}, \text{labor}, \text{capital}), where output depends on real factors and is unaffected by price levels in the long run.

Other Usages and Modern Extensions

Behavioral and Decision-Making Contexts

In behavioral economics, the concepts of short-run and long-run decision-making are often analogized to Daniel Kahneman's dual-process theory, where short-run choices align with System 1 thinking—fast, intuitive, and prone to biases—while long-run planning corresponds to System 2 thinking, which is slower, deliberative, and more rational. This framework highlights how immediate pressures lead to heuristic-driven decisions that may deviate from optimal outcomes, whereas extended horizons encourage analytical evaluation to align actions with future goals. Kahneman's model, building on earlier work in cognitive psychology, underscores the tension between these modes in everyday economic behaviors. A classic example is , where short-run impulse buying—triggered by emotional cues and immediate gratification—contrasts with long-run savings strategies that require disciplined foresight. shows that impulse purchases often stem from affective states overriding premeditated intentions, leading to suboptimal financial outcomes like reduced wealth accumulation over time. Similarly, , developed by and , explains biases in short-run risk assessment, where individuals exhibit and risk-seeking behavior in the face of potential losses, such as holding onto depreciating assets too long due to the emotional weight of realizing a loss. These patterns, rooted in foundational studies on judgment under uncertainty, reveal how short-run heuristics distort probabilistic evaluations compared to long-run rational adjustments. This distinction extends to time inconsistency, where short-run self-control failures undermine long-run objectives, as modeled by . In these frameworks, individuals overvalue immediate rewards relative to delayed ones, leading to on savings or health goals despite earlier intentions; for instance, a person might plan to exercise regularly but succumb to short-run temptations like skipping workouts for leisure. Such dynamic inconsistencies, where preferences shift over time, challenge traditional assumptions in and emphasize the need for commitment devices to bridge short-run impulses with long-run rationality.

Applications in Contemporary Economies

In the , digital platforms like exemplify short-run flexibility in labor supply, where individual workers can adjust their hours on demand in response to real-time variations and personal circumstances, while the underlying platform infrastructure remains fixed. This allows drivers to optimize their work around fluctuating reservation wages, generating significant surplus—estimated at over twice that of inflexible arrangements—through elastic labor supply with a elasticity exceeding 1.5. However, in the long run, these platforms enable technological , as software updates and network expansion permit rapid growth without proportional increases in fixed costs, allowing to scale to annual levels of around $14,000 for prime-age workers engaging in gig work following spells. AI automation further shortens long-run adjustment times in contemporary economies by accelerating gains and task creation, potentially reducing the period needed for labor markets to reequilibrate after displacements. Unlike traditional , which may prolong adjustments through job polarization, AI's ability to augment work—such as through enhanced —can generate new opportunities faster, with models suggesting wage growth and recovery as outpaces displacement. For instance, in , initial AI adoption may yield short-term losses due to frictions, but long-run gains emerge as firms adapt, compressing the overall transition timeline compared to historical technological shifts. Supply chain disruptions during the COVID-19 pandemic blurred the boundaries between short-run and long-run periods by turning temporary shocks into persistent structural challenges, as global interdependencies amplified immediate effects into enduring vulnerabilities. In 2020, U.S. foreign direct investment fell 49% amid import declines of up to 64.4% in affected sectors, with regional variations—such as New Hampshire's milder 7% export drop—highlighting how localized networks mitigated short-run impacts but exposed long-run risks in diversified chains. Post-2020 analyses indicate that digital platforms in the gig and supply sectors have reduced short-run fixity by enabling quicker reallocations of resources, such as through on-demand logistics, thereby hastening recovery and altering traditional adjustment dynamics in the 2020s economy. A unique aspect of platform economies is how network effects erect long-run , fundamentally altering adjustment processes by favoring incumbents with large user bases and creating quasi-monopolistic structures. These effects amplify value as more participants join, deterring new entrants through entrenched dependencies and high switching costs, which in turn slow market and limit competitive rebalancing over time. This dynamic shifts economic adjustments from fluid entry-exit patterns to ecosystem-based collaborations, where occurs within dominant platforms rather than through broad market reconfiguration.

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