Time Horizons for Decision Making
Economists classify the decisions that firms make into three types: (1)
how best to use existing plant and equipment—the short run; (2) what
new plant and equipment and production processes to select, given
known technical possibilities—the long run; and (3) how to encourage, or
adapt to, the development of new techniques—the very long run.
The Short Run
The short run is a time period in which the quantity of some inputs,
called fixed factors , cannot be changed. A fixed factor is usually an
element of capital (such as plant and equipment), but it might be land,
the services of management, or even the supply of skilled labour. Inputs
that are not fixed but instead can be varied in the short run are called
variable factors.
The short run does not correspond to a specific number of months or
years. In some industries, it may extend over many years; in others, it
may be a matter of months or even weeks. In the electric power industry,
for example, it takes three or more years to acquire and install a steam
turbine generator. An unforeseen increase in demand will involve a long
period during which the extra demand must be met with the existing
capital equipment. In contrast, a car mechanic’s shop may be able to
acquire new equipment in a few weeks. An increase in demand will have