Long Run in Economics
Definition
The long run describes an economic situation in which all factors of production and costs are variable. Firms can adjust inputs (capital, labor, materials, equipment), change production capacity, and enter or exit the industry. The long run is a theoretical horizon that allows full adjustment to changes in supply, demand, prices, wages, and expectations.
Mechanics
- All inputs are variable; firms can alter plant size, production lines, and workforce.
- Firms respond to expected profits by expanding or contracting capacity.
- The long run has no fixed calendar length; it depends on the firm, industry, and specific constraints (e.g., lease terms, investment lead times).
- In macroeconomics, the long run implies full adjustment of prices and wages to new equilibria.
Long-Run Average Cost (LRAC)
- LRAC is the average cost per unit when all production factors are variable.
- Graphically, the LRAC is the envelope of short-run average cost (SRAC) curves, each representing a specific fixed-capacity choice.
- Firms seek the output level and production methods that minimize LRAC for each quantity produced.
Economies and Diseconomies of Scale
- Economies of scale: As output increases, LRAC falls — producing larger quantities lowers cost per unit through efficiencies.
- Diseconomies of scale: At higher output levels, LRAC rises — additional scale increases per-unit costs due to coordination, management, or resource constraints.
- Constant returns to scale occur when LRAC is flat as output changes.
Long Run vs Short Run
- Short run: At least one factor of production is fixed (e.g., plant size), so firms have limited flexibility; short-run profits or losses are possible.
- Long run: All factors are variable, giving firms full flexibility to adjust operations; in many models (especially perfect competition), economic profits are competed away as firms enter or exit the market.
- The long run captures structural adjustments; the short run captures temporary responses.
Example
A company with a one-year lease may be constrained in the short run by that contract. After the lease expires (the long-run horizon for that constraint), the company can relocate, build a new facility, change factory size, or alter labor arrangements, enabling lower long-run average costs.
Why the Long Run Matters
- It shows the adjustments firms can make to minimize costs and improve efficiency.
- It explains how market structure affects profitability: in perfectly competitive markets, free entry and exit drive economic profits toward zero in the long run.
- It underpins investment and strategic decisions that determine industry structure and long-term competitiveness.
Key Takeaways
- The long run is a flexible, theoretical period in which all inputs and costs are variable.
- LRAC represents the lowest achievable average cost for each output level when firms can adjust all inputs.
- Economies of scale reduce per-unit costs as output expands; diseconomies reverse this.
- The long run differs from the short run in the degree of flexibility and implications for profits.