Long run

Long run is period where there are no fixed factors of production as to changing the output level and entering or leaving an industry. In the long run it is assumed that that all resources can be shifted from one form of production into another. The competitive economies allocate resources in an efficient manner in the long run. However the long run is not defined clearly in terms of time.

In the long run, the firms can change the production levels in response to (expected) economic profits or losses. The land, labor, capital goods and entrepreneurship are varied to reach associated long-run average cost. The plant capacity is the only fixed factor, a generic firm can make these changes in the long run:

• enter an industry in response to (expected) profits
• leave an industry in response to losses
• increase its plant in response to profits
• decrease its plant in response to losses.

In the long run, there are no imbalances in the supply and demand. Also the prices in the long run do not change with the changes in demand. However the quantity supplied changes because resources are assumed to be able to move freely into or out of the production of that particular good. In the long run the markets are at equilibrium where the price is equal to the minimum average total cost possible on the production cost curve. The marginal costs and the long-run average cost are equal in the long run.

The long run is stage of planning and implementing. A firm may decide that it should produce on a larger scale by building a new plant or adding a production line. The firm decides on the new technology to be incorporated in to the production. The optimal combination of inputs and technology for the long-run process is an essential feature in the long run. 

Questions

• What is a long run?
• What are the implications that firm has to undertake in the long run?