Difference Between Short Run and Long Run Production Function

Introduction

A short-run production function is when a company can't add new machines to make more stuff right away. But in the long run production function, they can add new machines instead of hiring more workers.

The production function shows how inputs and outputs are related. It tells us the most good we can make using the resources we have and the technology we know. There are two types: short-run and long-run production functions.

Definition of Short Run Production Function

In the short-run production function, at least one resource is seen as fixed and it can't be changed. The other resources can be adjusted as needed.

Usually, a company's capital, like machinery and equipment, is seen as unchangeable in the short run. So, to increase what they make, they have to adjust other things like labor or raw materials because it's hard to change their capital equipment quickly.

In this situation, we have the law of variable proportion or returns to variable input. It explains what happens when you add more of a variable input to a fixed one. In the short run, increasing returns happen because of factors like specialization, while diminishing returns occur because factors can be substituted perfectly.

Definition of Long Run Production Function

The long-run production function is when a company can change all its resources. It can work at different levels because the company can adjust everything based on how business is going. So the company can switch between different sizes as needed.

In this situation, we have the law of returns to scale, which explains how output changes as production levels change. Increasing returns to scale happen because of economies of scale, while decreasing returns to scale happen because of diseconomies of scale.

Key Differences Between Short Run and Long Run Production Function

The following shows how the short-run and long-run production functions differ from each other:

1. The short-run production function refers to a period when the firm cannot adjust the quantities of all inputs. On the other hand, the long-run production function represents a time period during which the firm can change the quantities of all inputs.
2. In the short-run production function, the law of variable proportion is at play. Meanwhile, in the long-run production function, it's the law of returns to scale that governs the relationship between inputs and outputs.
3. In the short-run production function, the activity level remains constant, while in the long-run production function, the firm has the flexibility to expand or reduce its activity levels as needed.
4. In the short-run production function, the factor ratio changes because one input varies while the others remain fixed. Conversely, in the long-run production function, the factor proportions remain the same as all factor inputs vary in proportion to each other.
5. In the short run, there are barriers preventing new firms from entering the market, and while firms can shut down temporarily, they cannot exit the market permanently. However, in the long run, firms are free to enter or exit the market as they please.

Difference Between Short Run and Long Run Production Function

Conclusion

To sum up, the production function is essentially a mathematical representation of the relationship between inputs and outputs in technology.

Exactly, the short run and long run are relative terms that depend on the specific context of the production process. It's not about specific durations like days, months, or years but rather about whether all inputs are variable or not. In the short run, at least one input is fixed, while in the long run, all inputs can be varied.