The Short Run vs. the Long Run

In economics, the short run and long run are defined not by the calendar but by which of a firm's inputs can still be changed.

Economists constantly talk about the short run and the long run, but these phrases do not refer to a specific number of weeks or years. Instead, they describe how flexible a firm’s decisions are. In the short run, at least one of a firm’s inputs cannot be changed; these are called fixed inputs. In the long run, every input can be changed, and firms can even enter or leave an industry altogether. Inputs that can be adjusted quickly, like hours of labor or raw materials, are called variable inputs.

The short run: working with what you have

Consider a bakery. In the short run, it has one building and two ovens. It can bake more bread by hiring extra workers, running longer shifts, and buying more flour - all variable inputs. But it cannot instantly build a second shop or install five new ovens. Its size is fixed for now.

Because some inputs are fixed, adding more of the variable inputs eventually gives smaller and smaller gains. The first few extra bakers might sharply increase output, but once the two ovens are running constantly, each additional baker adds less and less, since they end up waiting for oven space. This pattern is called diminishing marginal returns, and it is a short-run idea: it happens precisely because something is fixed. It is also why marginal cost, discussed earlier in this module, tends to rise as output grows in the short run.

The long run: everything can change

In the long run, the bakery can rent a bigger building, buy more ovens, adopt new technology, or close entirely. With every input variable, the firm can choose the combination and scale that produces its output at the lowest cost. This is where ideas like economies of scale come into play, since the firm can decide how large to be.

The long run also allows entry and exit. If bakeries in a town are earning unusually high profits, new bakers will open shops, adding to supply and pushing prices and profits down. If bakeries are losing money, some will close, reducing supply until the remaining ones can cover their costs. In a competitive market, this process tends to push long-run economic profit toward zero.

How long is the long run?

The answer depends on the industry. A food stall might be able to change everything - its location, equipment, and size - within a couple of weeks, so its long run is short. A steel plant or a power station can take several years to build, so its short run can last a very long time. A delivery business can hire drivers within days but might need months to expand its warehouse. The dividing line is not time on a calendar but whether every input can be adjusted.

Why the distinction matters

The difference explains many real events. When demand for a product suddenly rises, prices often jump in the short run because firms cannot quickly expand. Over the long run, firms build more capacity and new firms enter, so prices usually settle down again. The same logic applies to decisions about whether a struggling firm should keep operating: in the short run, it may make sense to stay open even at a loss, as the next lesson explains, while in the long run a firm that cannot cover all its costs will leave the market.

Treating the long run as a fixed length of time

A common mistake is assuming the long run means something like "more than one year." In economics, the short run and long run are defined by flexibility, not by calendar time. Asking "which inputs can this firm still not change?" is the right test. If the answer is "none," you are in the long run.

Key takeaways

In the short run, at least one input is fixed; in the long run, all inputs can change.
Diminishing marginal returns occur in the short run because some inputs are fixed.
In the long run, firms choose their scale and can enter or exit an industry.
Entry and exit tend to push long-run economic profit toward zero in competitive markets.
How long the long run takes depends on the industry, not on a set number of months.