Long Run: Definition, How It Works, and Example
Long Run Defined: What is it?
The long run is a time frame during which all cost and production factors are inconsistent or changeable. Businesses can alter all costs over the long term, but in the short term, they can only change pricing by altering output levels. Even if it might hold a monopoly in the short run, a business may anticipate competitors in the long term.
How does Long Run work?
In the long run, a producer or manufacturer might be flexible with their production choices. Based on anticipated revenues, businesses can either increase or decrease their production capacity or enter or leave a certain industry. Businesses looking at the long term know they can't change production levels to bring demand and supply into equilibrium.
The long run is the timeframe in macroeconomics during which the overall price level, contractual wage rates, and anticipations fully adapt to the state of the economy. This contrasts with the short term when these factors might not fully adapt. Additionally, long-run models may vary from short-run equilibrium, wherein demand and supply respond more flexibly to price levels.
Depending on anticipated economic profits, businesses may alter their production levels. By establishing a new facility or adding a production line, a company may execute change by raising or reducing the scale of output in accordance with profits or losses. Contrarily, all production elements are fixed during the short term except for labour, which is still a variable.
As an illustration, a company with a 1-year lease will have its long run defined as any time frame greater than a year because it is no longer subject to the lease after that point. In the long run, the amount of labour, the size of the plant, and the manufacturing procedures can all be changed as necessary to meet the company's or lease issuer's demands.
LRAC and Long Run
A business will eventually look for the production techniques that will enable it to produce the required output level for the least cost. If a business is not manufacturing at the lowest feasible cost, it risks losing market share to rivals that can make and sell similar products for the lowest possible price.
The long-term is related or connected to the long-run average cost (LRAC or LRATC, where T stands for Total), which is typically the average output cost achievable when all production parameters are changeable. The LRAC curve is the curve that a business would follow to reduce its unit cost for each specific long-run output quantity.
In contrast, one specific fixed cost level is usually represented by the short-run average cost (SRAC) curves that may make up the LRAC curve in the long run. Consequently, for any amount of output, the LRAC curve will be the least expensive average cost curve. Internal economies of scale are used as long as the LRAC curve falls.
Economies of scale occur when the cost per unit decreases as the volume of production increases. In actuality, economies of scale are cost advantages attained when the scale of manufacturing is increased. Cost advantages increase production efficiency, giving a company a competitive edge in its market. This could result in cheaper costs, more sales and better profits for the company.
If LRAC decreases as output rises, the business gets advantages from economies of scale. The business experiences diseconomies of scale if LRAC gradually begins to increase, and if LRAC is constant, the business experiences constant returns to scale. Depending on the type or nature of businesses, different LRAC approaches are followed for better and more efficient results.