Slide 44 of 44
Notes:
In our previous discussion the terms “short run” and “long run” were mentioned. What do these terms mean? Well there meanings are unique in economics relative to the way we often hear the terms in every day use. A formal definition of each may be found in the glossary of your text books. Look them up, and read them. I’ll use an example borrowed from Mabry and Ulbrich (1989): “the short run is the time period in which one or more important conditions cannot be changed. A firm may make decision ‘in the short run’ because its building lease runs for another year or two, or because its workers have a three-year labor contract. Workers may make decision in the short run because they have a fixed commitment, such as wanting to stay put until their children finish high school. Thus, most of the firm’s workers may accept a pay cut in the short run, but once their fixed commitments are gone, the long-run response may be very different. For some firms or individual the short run may be only a week or a month, while for others the short run may be years. The exact length of the short run depends on the length of the fixed commitments people face in a given situation.”
“The long run is the time period in which anything can be changed, or in which individual and firms are fully able to respond to economic incentives and take advantage of economic opportunities. The long run has no specific time frame; it is simply the time period that is long enough to allow full response to changing incentives.
