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Talk about the difference between long-run and short-run. If you were a business owner, how would...

Talk about the difference between long-run and short-run. If you were a business owner, how would you apply these principles to make decisions about your business? You will need to define short-run and long-run from your own knowledge, explain the difference, and then determine what decisions you would have to make in time frames. You may use your Fortune 500 company if you like.

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Answer:

The difference between short-run and long run :

  • There are fixed and variable factors of production in the short run while in the long run there are only variable factors of production
  • In the short run labour, raw material etc are variable factor and land (building), machinery etc. are fixed factors but in long run all these factors are variable
  • In short run we can make changes only in few variable while in long run we can change all the factors.
  • In short run firm can only influence prices by adjusting production while in long run it can influence all costs.

The decision we can take in these time frames :

In short run:               

In short run to earn more profit we can influence production which will affect prices. To increase profit margins we can reduce the output of the commodity which have high demand, the shortage will increase the price of the commodity. In short run we can earn high profits

In long run:

To earn more profit we can reduce the cost of production by changing the proportion of its factors. The reduction in the cost will increase the profit of firms. In this time frame we can only earn normal profit or loss if we are in perfect or monopolistic market and earn high profits when we are in monopoly.

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