What it means
The easiest way to understand the long run is to ask what a firm cannot change quickly. A restaurant can hire extra staff next week, but building a second kitchen or a new factory takes much longer.
The long run is the period over which nothing is locked in, so the owner can expand, shrink, relocate or exit the market entirely. Because every input can change, costs behave differently.
In the short run some costs are fixed (they do not vary with output, such as a lease), but in the long run all costs are variable. This is why economists describe long-run planning as deciding the scale of operation, rather than just how hard to run existing equipment.
The idea matters to managers deciding on big investments. A company choosing between a small plant and a large plant is making a long-run decision, and it will usually look for the size that gives the lowest average cost per unit.
Growing beyond that size can bring diseconomies of scale (higher unit costs as the business becomes harder to manage). The long run also shapes how markets behave.
When firms in an industry earn unusually high profits, new competitors can enter and existing ones can expand, which gradually pushes prices and profits back down. When firms make losses, some exit, and the remaining ones recover.
Finance people use the term more loosely. Phrases such as "long-run average return" or "long-run growth rate" refer to a horizon over which short-term noise averages out, and the length of that horizon depends on the context.
Investors and analysts also use the idea when judging company strategy. A business that looks unprofitable in the short run because it is still building capacity may be perfectly sound in the long run, and the reverse can also be true.
Asking which costs and constraints will still exist after the next round of investment is a useful habit in any planning meeting.
In practice
Real-world examples.
Example
A craft brewery is selling out every batch from its single fermenting room. In the short run it can only add shifts, but in the long run it can lease a larger unit and buy bigger tanks, which is the decision its owners now study.
Example
A retailer that has signed a ten-year lease on a flagship store treats the lease as fixed for planning in the coming year. When the lease nears its end, the retailer faces a long-run choice about whether to renew, move or close.
Example
A telecom regulator reviews whether prices charged by a network owner are reasonable. It bases its analysis on long-run costs, because in the long run the owner must be able to replace and upgrade the network, not just run what exists.
Case study
Seen in the real world.
Lakeshore Printing is an illustrative, fictional commercial printer with one press running two shifts. Demand grew steadily, and the owners faced a decision: squeeze in a third shift, which was a short-run fix with rising overtime costs, or buy a second press, which was a long-run commitment.
The finance manager compared unit costs. The third shift would cut margins because overtime premiums pushed up the cost of each printed sheet, while the second press would reduce unit costs once volume rose above a certain level, despite a large upfront outlay.
The owners chose the second press, treating it as a long-run decision about scale. In this illustrative story the lesson is that the short run is about using what you have, and the long run is about deciding what you should have. Two years on, unit costs had fallen by about 12%, which the owners credited to choosing scale deliberately rather than stretching old equipment.
Watch out
Common mistakes.
- Thinking the long run means a specific number of years, when it simply means a period in which all inputs can be changed.
- Assuming costs that look fixed today are fixed forever, when contracts, leases and equipment eventually come up for renewal.
- Using short-run results to judge long-run strategy, for example judging a new plant by its first quarter of low utilisation.
Questions
People also ask.
Is the long run the same for every business?
No. For a market stall it might be a few weeks, while for an oil refinery or a power station it can be a decade or more.
What is the difference between the short run and long run?
In the short run at least one input, such as factory size, is fixed, whereas in the long run every input can be adjusted.
Why do economists say there are no fixed costs in the long run?
Because over a long enough period every commitment can be ended, sold, or renegotiated, so every cost becomes variable.
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