Short-run Vs Long-run

A word on the street may refer to today as the short-run and 5 years to come as the long-run, but that is not applicable in Economics.

There is no distinction between the short-run and the long-run on the time-frame. Many would say 5 years is the long-run while some may controvert the submission by saying it is still the short-run.

To clear the confusion and debatable submissions, Economists use the flexibility of inputs to outline the difference between the two. Keep in mind the study of Economics always attempts to study the complexity of reality, utilizing models, there is a presumption that there are only two inputs, which are labour and capital.

Labour is referred to be the most variable input while capital is projected to be fixed. Imagine a firm that had been recently established, suppose you observe the operation of that firm you would notice that the number of workers is greater than the number of machines deployed, reason being that labour is a variable input even in the short-run while capital is a fixed input in the short-run. This also corroborate why firms in the short-run are labour intensive.

Short-run

With the above given mini-scenario, we define the short-run as a period in which most inputs are fixed, instigating the Diminishing Marginal Returns, meaning as long as a firm operates in the short-run with most inputs being fixed or labour being the only variable input, each additional one extra unit of labour contributes less and less.

Long-run

The long-run is projected that all inputs are variables. This permits the firm to increasing its output and increase profits margins as all the capital which were previously fixed and limited now are variables and available. However, firms in the long-run become more capital intensive causing structural unemployment.

As you have seen there is no plain distinction of the short-run and the long-run using time, it depends on the capacity of the firm. For some firm it might take over 30 years to turn all their fixed inputs into variable inputs, impeding them from expanding and increasing profit margins, while for other firms it may take them only 15 years.

Perfect competition

Others use the perfectly competitive market as an indicator, acknowledging that a perfectly competitive firm makes an economic profit in the short-run, while experience a normal profit in the long-run due to no barriers to entry.