Production requires not only labour and land but also time. Pipelines cannot be built overnight, and once built they last for decades. Farmers cannot change crops in mid season. It often takes a decade to plan, construct, test and commission a large power plant. Moreover, once capital equipment has been put in the concrete form of a power plant on the Tennessee River or a giant petrochemical factory in Mexico, the capital cannot be economically dismantled and moved to another location or transferred to another use.
To account for the role of time in production and costs, we distinguished two different time periods. We define the short run as a period in which firms can adjust production by changing variable factors such as capital. The long run is a period sufficiently long so that all factors including capital can adjust.
To understand these concepts more clearly, consider the way of production of steel might respond to change in demand. Say that Nippon Steel is operating its furnaces at 70 percent of capacity when an unexpected increase in the demand for steel occurs because of the need to rebuild from an earthquake in Japan and California. To adjust to the higher demand for steel, the firm can increase production by increasing worker overtime.
To account for the role of time in production and costs, we distinguished two different time periods. We define the short run as a period in which firms can adjust production by changing variable factors such as capital. The long run is a period sufficiently long so that all factors including capital can adjust.
To understand these concepts more clearly, consider the way of production of steel might respond to change in demand. Say that Nippon Steel is operating its furnaces at 70 percent of capacity when an unexpected increase in the demand for steel occurs because of the need to rebuild from an earthquake in Japan and California. To adjust to the higher demand for steel, the firm can increase production by increasing worker overtime.
