6.8 : Long Run

In the short run, the firm holds one input, such as capital, constant.

However, in the long run, firms can adjust both labor and capital to change their scale of production. This flexibility allows firms to alter the mix of inputs to easily change their output levels.

For example, a diamond processing company can buy more machines and hire more workers to process more diamonds.

Also, in the long run, a firm can use different combinations of labor and capital.

For example, the diamond processing company can use a greater workforce with skilled artisans physically cutting and processing diamonds and a few automated machines operated by workers. However, suppose the cost of skilled labor increases, and technological advancements make automated machines more affordable. In that case, the company can reduce the number of artisans and increase the use of automated machines.

The choice between production methods in the long run depends on factors such as the relative prices of inputs, technological advancements, and the expected long-term demand for the product. Understanding the long run helps in making decisions related to expansion, investing in new equipment, and hiring more employees.