The short run is considered a period of time too brief for firms to alter such resources as building space and machinery.
However, the short run is long enough for firms to alter raw materials, labor, power, and output. Firms can determine
the intensity in which they use their building space and machinery in the short run.
The long run is a period of time that allows for adjustments in all of a firm’s resources. The long run can be enough
time for a firm to leave an industry and for other firms to enter an industry. The long run is also known as the variable
period. Nothing is fixed in the long run.
For example, if a company hires an extra 200 workers to increase production, this can be done in the short run. The com-
pany’s decision to employ additional labor is based on increasing revenue. New labor can be implemented in a relatively
short amount of time. If on the other hand the company decides to add more factory space and install more machines in
that factory space, we have to look at the long run. Only in the long run can the company implement these resources and
see an impact on its production.
It is important to remember the differences between the short run and the long run. They are not periods on a calendar that
can be pegged for specific dates. Rather, these conceptual dates are used by firms to determine the relationship between
levels of production and time. The long run can be experienced rather quickly by smaller firms relative to larger firms
because it takes less time for them to increase capital. A fast food restaurant, for example, can increase its machinery
overnight by simply adding another oven or cooker.
Short-Run Production
A firm’s decision to alter production depends on the prices of the inputs needed to modify production. The supply and
demand of resources determines the prices of resources. If your firm produces cars and there is a steel shortage, your
decision to increase production may be put on hold. In this instance, you’ll focus on labor resources rather than physical
resources.
When examining a firm’s output, you must consider three types of output:
■ Total product:The total quantity of a good produced
■ Marginal product:The added unit of a variable resource to the production process
Marginal product = Change in total product / Change in labor input
■ Average Product: The output per worker
Average product = Total product / Units of laborWe know that the short run is a period where firms can change labor resources to alter production. Now let’s take a
closer look at how much a firm’s output rises in the face of added labor.
When firms decide to add labor to increase productivity, they do so in a cautious way because more workers does not
necessarily mean more output. Diminishing marginal returns describes the point when labor is added but yields a
decline in marginal product. Essentially, when labor is added firms expect an increase in productivity. But this is not
true all of the time. For a period of time, firms will notice increases in output. However, those increases in output will
become less with each worker added until there are no increases in output and sometimes even negative growth. The
point at which the firm discovers diminishing marginal returns, an adjustment has to be made. The firm can either cut
back on labor units or expand capital. A lack of capital sometimes contributes to diminishing marginal returns.
Suppose a donut store has three workers working in limited, often confined kitchen space. To increase productivity, the
store may want to employ more workers. For a period of time, the workers will help productivity. Over time with each new
worker added, production will begin to increase at smaller intervals. Soon, the workers will start getting in one another’s
way, and this will result in negative growth for the store. The workers will have to wait in line to use the machinery,
walkway spaces will become crammed with people and raw materials, and the store would turn into one giant mess.
Consequently, the total product of the store will start diminishing; the marginal product of additional workers will decline
because of the amount of labor relative to machinery. In time, if the store continues to hire more employees, the total prod-
uct will go to zero due to the lack of store space. Figure 9-2 illustrates diminishing marginal returns on a grid.
Production Costs