On a day-to-day basis, a firm may not be able to vary output at all. For example, a flower seller, once the day’s flowers have been purchased from the wholesaler, cannot alter the amount of flowers available for sale on that day. In the very short run, all that may remain for a producer to do is to sell an already produced good.
• Short run. At least one factor is fixed in supply. More can be produced, but the firm will come up against the law of diminishing returns as it tries to do so.
• Long run. All factors are variable. The firm may experience constant, increasing or decreasing returns to scale. But although all factors can be increased or decreased, they are of a fixed quality.
• Very long run. All factors are variable and their quality and hence productivity can change. Labor productivity can increase as a result of education, training, experience and social factors. The productivity of capital can increase as a result of new inventions (new discoveries) and innovation (putting inventions into practice). Improvements in factor quality will increase the output they produce: These curves will shift vertically upwards. Just how long the ‘very long run’ is will vary from firm to firm. It will depend on how long it takes to develop new techniques, new skills or new work practices.
It is important to realize that decisions for all four time periods can be made at the same time. Firms do not make short-run decisions in the short run and long-run decisions in the long run. They can make both short-run and long-run decisions today. For example, assume that a firm experiences an increase in consumer demand and anticipates that it will continue into the foreseeable future. It thus wants to increase output. Consequently, it makes the following four decisions today.
• It accepts that for a few days it will not be able to increase output. It informs its customers that they will have to wait. It may temporarily raise prices to choke off some of the demand.
• It negotiates with labor to introduce overtime working as soon as possible, to tide it over the next few weeks. It orders extra raw materials from its suppliers. It launches a recruitment drive for new labor so as to avoid paying overtime longer than is necessary.
• It starts proceedings to build a new factory. The first step may be to discuss requirements with a firm of consultants. In the long run, a firm is able to vary the quantity it uses of all factors of production. There are no fixed factors.
• It institutes a programme of research and development and/or training in an attempt to increase productivity.
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