Definition of Long Run in Economics


In the long run, classical economics assumes that all resources can be shifted from one form of production into another. This assumption is essential for the conclusion that in the long run competitive economies allocate resources in an efficient manner. Of course, the long run is never clearly defined in terms of time. Some contend that the long run is a relatively unimportant concept in application because it ignores the reality of an economy in the short run.

"Stickiness" of resources

In the short run, resources cannot shift from one type of economic activity to another. Consequently, equipment and labor can be left underused or idle. For example, a laborer who specialized in a manufacturing task cannot quickly move to a job programming computers. In the long run, labor is assumed to be completely fluid from one function to another.

Short-run imbalances

Because of the stickiness of resources in the short run, in the short run there can be imbalances in supply and demand. Areas in which there is increased demand may encounter shortages until resources can be shifted to it and likewise areas of decreasing demand can see excess supply. The long run is assumed to have no imbalances of this sort.

Reactions to changing demand in the short run versus the long run

When there is a change in demand in the short run, the market responds with a change in prices, that is, prices go up if demand increases and down if demand drops. However, in the long run, prices do not change with changes in demand. Instead, the quantity supplied changes because resources are assumed to be able to move freely into or out of the production of that particular good.

Speeding the shift of resources

Governmental policies can help expedite the efficient allocation of resources, as is imagined in long-run economic models. For example, programs that help train laborers for developing markets who were once employed in now obsolete industries help mitigate short-run stickiness.

Efficiency under the long-run model

Markets in the long run are at equilibrium when the price is equal to the minimum average total cost possible on the production cost curve. Also, at this point, marginal costs and the long-run average cost are equal. Further, when there is long-run equilibrium there is always short-run equilibrium.

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