Managers Understand The Mechanics Of Supply And Demand Both In The Short-Run And In The Long-Run

Managers Understand The Mechanics Of Supply And Demand Both In The Short-Run And In The Long-Run

Introduction

The long run and the short run do not refer to a specific period of time such as 3 months or 5 years. The difference between the short run and the long run is the flexibility decision makers have. "The short run is a period of time in which the quantity of at least one input is fixed and the quantities of the other inputs can be varied. The long run is a period of time in which the quantities of all inputs can be varied. There is no fixed time that can be marked on the calendar to separate the short run from the long run. The short run and long run distinction varies from one industry to another."

Discussion

Suppose the demand for hockey sticks has greatly increased, prompting our company to produce more sticks. Manager should be able to order more raw materials with little delay, so we consider raw materials to be a variable input. Manager will need extra labor, but we can likely increase our labor supply by running an extra shift and getting existing workers to work overtime, so this is also a variable input. The equipment on the other hand, may not be a variable input. It may be time consuming to implement the use of additional equipment. It depends how long it would take us to buy and install the equipment and how long it would take us to train the workers to use it. Adding an extra factory is certainly not something we could do in a short period of time, so this would be the fixed input.

The increase in demand for hockey sticks will have different implications in the short run and the long run at the industry level. In the short run each of the firms will increase their labor supply and raw materials to meet the added demand for hockey sticks. At first only existing firms will be likely to capitalize on the increased demand as they will be the only ones who will have access to the four inputs needed to make the sticks. However we know that in the long run the factor input is variable as well. This means that existing firms can change the size and number of factories they own and new firms can build or buy factories to produce hockey sticks. In the long run we will see new firms enter the hockey stick market, while we will not in the short run because firms will not be able to acquire all of the inputs they need.

Firms in a market economy are privately owned and guided by the price system and the profit-los system (3 Ps of a market economy: Private property, Prices and Profit/loss).  Goal of the firm: Maximize Profits or Maximize Shareholder Wealth.

Owners (shareholders) of a firm are called "Residual ...