Question

2. Describe firm’s input decision in the short run and in the long run

Answer 1

A short run is defined as a time period in which there is at least one fixed input. In the short run a firm can increase its output by hiring more number of workers but the firm cannot change certain fixed input quantities such as the firms plant size because they cannot be easily changed in a short period of time. In the short run, plant size and capacities remain fixed inputs while other quantities such as capital or labor can be changed.

A long run is a time period that is so long enough that a firm can change the quantity of all the inputs. In the long run the firm can increase the production capacity by purchasing new machinery, it can build new factories, existing firms can leave the industry and new firms can enter.  Thus in the long run it is possible to vary all factors of production including the plant size, capacity and hence there are no fixed inputs in the long run.