Long Run
A long run is a time period long enough to significantly change output or its structure, i.e., a period in which production capacity can change. During this period of time, enterprises may move from one industry to another or disappear from the market.
Long Run explained
The special significance of the long run period in economic theory is that during it the firm faces situations in which it must decide whether or not to enter a new industry, expand or reduce the scale of the enterprise, relocate, modernize or reorganize production.
Note that short run and long run periods need not be associated with the length of time, for example, short-term up to six months and long run is usually beyond that interval. These periods differ only in what factors of production the firm changes, producing a particular volume of goods and services. In certain industries (say, energy) the short-term period may last more than 10 years, and in the aerospace industry the long run period has a duration of 2-3 years.
The importance of this period is that in economic theory it is characterized by the fact that during it the company is faced with various situations that require a decision to enter or not to enter a new industry or becomes a question of expanding production or reducing it, as well as relocating, modernizing or reorganizing it.
It is worth paying special attention to the fact that the short-term and long run periods can not be associated with a long period of time. For example, a short-term period is three months, a long run period is six months. The primary difference between these periods is the factors of production which a company changes, producing a certain amount of goods and services.
Long Run Average Cost (LRAC)
According to long run, a company will look for a production technology that facilitates it in producing the needed amount of product at the lowest possible cost. This is called the long run average cost. If the company does not cope with the lowest cost production, it may lose market share to competitors who are able to produce and sell goods at the lower costs.
The measures that can lead to the cost reduction are:
- improvement of production processes in the enterprise;
- saving and rational use of resources;
- increase in labor productivity;
- availability of modern equipment;
- careful study of consumer behavior.
Economies of scale are those that organize the production process in such a way as to maximize the use of the factors of production involved in the process, achieving as a result low production costs and an increase in goods and services. This occurs when the expansion of a company's or industry's production capacity results in an increase in the total amount of products produced without a proportional increase in the cost of production.
As a result, the average cost of a product tends to fall as production increases. More specifically, economies of scale exist if, as the factors of production (workers, machinery, etc.) increase, output increases more than proportionately.
