Category: Economics > Microeconomics
Subject: Long Run
Details: In the economic theory of the firm, we generally discuss only two factors, labor and capital, and in the short run labor is the variable factor and capital is the fixed factor of production. The long run is a period of time that is long enough for all factors of production to be changed. It is not measured by the number of calendar days, but in how long it takes to change the quantity of capital used by a firm. Think of the length of time to enter an industry, for example.
(A) Briefly explain why capital is the fixed factor in the short run, and not labor. (B) Then describe (1) a business or industry where the long run is a relatively short or brief period of time and (2) another business or industry where the long run is a relatively long period of time.
A) Short-Rum Demand for Labor is variable because the seller is a price-taker in the resource market. The firm can hire all the labor at the going wage rate (W) to reach the efficient level of output. But since the firm cannot generate capital resources in the short time frame of the short run, the capital K is assumed to be fixed. In the Long Run demand for labor, the amount of labor firm will employ at various wage rates depends on labor and capital, as they are variable. Additional capital ...