Terms

Long Run Definition How It Works and Example

Long Run Definition How It Works and Example

Mitchell Grant, a self-taught investor with over 5 years of experience as a financial trader, is a financial content strategist and creative content editor.

The long run is an economic term that refers to a period when all factors of production and costs can be varied. In the long run, firms can adjust their costs and operate in a market with a variable number of producers, allowing them to enter or exit the market depending on profitability. In this situation, firms do not make economic profits, and even if they are a monopoly in the short term, competition can be expected in the long run.

Key Takeaways:

– The long run is a period when all factors of production and costs are variable.

– Firms aim to find the most cost-effective production technology.

– The long run is associated with the LRAC curve, which minimizes costs per unit for each quantity of output.

– Internal economies of scale are being exploited when the LRAC curve is declining.

The long run is characterized by flexibility in production decisions. Manufacturers or producers can adjust inputs such as capital, labor, materials, and equipment. Businesses can expand or reduce production capacity and enter or exit an industry based on expected profits. The long run in macroeconomics refers to a period when price levels, wage rates, and expectations fully adjust to the state of the economy. Long-run models may also differ from short-run equilibrium, allowing supply and demand to react more flexibly to price levels.

Companies can change production levels in response to expected economic profits. They may increase or decrease the scale of production, which can involve building new plants or adding production lines.

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The term "long run" is not specific to a certain period of time, but rather depends on the firm, industry, or economic factor being studied.

In the long run, firms search for cost-effective production technologies to achieve their desired output levels. If a company is not producing at its lowest possible cost, it may lose market share to competitors who can produce and sell at minimum cost. The long run is associated with the long-run average cost (LRAC), which represents the average cost of output when all factors of production can be varied. The LRAC curve is made up of a group of short-run average cost curves, with the least expensive average cost curve for any level of output being the LRAC curve. The declining LRAC curve indicates the exploitation of internal economies of scale.

Economies of scale occur when the cost per unit decreases as the quantity of output increases. This leads to improved production efficiency and can give businesses a competitive advantage, resulting in lower costs and higher profits. If the LRAC is falling as output increases, the firm is experiencing economies of scale. When the LRAC starts to rise, the firm experiences diseconomies of scale, and if the LRAC is constant, the firm experiences constant returns to scale.

The long run and short run are contrasting economic situations. The short run involves at least one fixed factor of production, while the long run allows all factors to be variable. Ordinary profits are typical in the long run, while the short run allows firms to realize economic or exceptional profits.

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The long run is important in economics as it demonstrates how well-run and efficient firms can be when all factors of production and costs are variable.

Perfect competition characterizes the long run, allowing firms to easily enter the market. As a result, profits can be easily eliminated due to the possibility of countless competing firms in the same space. However, companies can also easily exit the market, eliminating losses.

The benefits of the long run include the ability for firms to make adjustments to their operations and reduce costs by shaping their factors of production. Flexibility is achieved through variable costs.

In conclusion, the long run is a situation where companies can operate with variable production factors and costs. This allows for flexibility and adjustments to keep costs down. However, perfect competition limits the chance for exceptional profits.

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