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Another important concept for business owners is the idea of short-run and long-run decision making. In the short-run, at least one of the firm's factors of production is fixed. Generally, this is their capital. For many businesses, their building rent is considered the fixed cost since many business owners sign long-term lease agreements. In the long-run, everything in the business is considered a variable cost since firms can plan to expand or reduce operations in the long-run.

As a business owner/decision-maker, why do you think it is important to understand the difference between these two concepts? How does the business owner/decision-maker make choices for their firm in the two different time frames?

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Darryn D'Souza
Darryn D'SouzaLv10
28 Sep 2019

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Related questions

Question:

Is it true that in a short-run production process, the marginal cost curve eventually slopes upward because firms have to pay workers a higher wage rate as they produce more output? Explain your answer.

Answer:

According to the definition of the short-run in Investopedia, the short-run, in economics, expresses the concept that an economy behaves differently depending on the length of time it has to react to certain stimuli. The short-run does not refer to a specific duration of time but rather is unique to the firm, industry, or economic variable being studied. A key principle guiding the concept of short-run and long-run is that in the short-run, firms face both variable and fixed costs, which means that output, wages and prices do not have full freedom to reach a new equilibrium. Most businesses make decisions not only about how many workers to employ at any given point in time (i.e. the amount of labor) but also about what scale of an operation (i.e. size of factory, office, etc.) to put together and what production processes to use. In contrast, economists often define the short-run as the time horizon over which the scale of operation is fixed and the only available business decision is the number of workers to employ. Technically, the short-run could also represent a situation where the amount of labor is fixed and the amount of capital is variable, but this is fairly uncommon. The logic is that even taking various labor laws as given, it's usually easier to hire and fire workers than it is to significantly change a major production process or move to a new size of factory or office. In the short-run, one factor of production is fixed, e.g. capital. This means that if a firm wants to increase output, it could employ more workers, but not increase capital in the short-run (it takes time to expand.) Therefore in the short-run, we can get diminishing marginal returns, and marginal costs may start to increase quickly. Also, in the short-run, we can see prices and wages out of equilibrium, e.g. sudden rise in demand, may lead to higher prices, but firms don't have the capacity to respond and increase supply.


Tejvan Pettinger. (2015). Short-run, long-run, very long-run. Glossary Terms. Economics help blog. NY: Helping to Simplify Economic.
Retrieved from: http://www.economicshelp.org/blog/glossary/short-run-long-run-very-long-run/
Short-Run. Short-Run Definition | Investopedia
Retrieved from http://www.investopedia.com/terms/s/shortrun.asp#ixzz4KO1YXsri

I need a peer reply for this, please.

Q8. To arrive at a logical determination of a firm's optimum output, economists assume that the firm seeks to
a. maximize output
b. minimize cost
c. maximize profit or minimize loss
d. maximize price

Q9. So long as marginal cost is rising, average variable cost must rise.
a. true
b. false

Q10. As output increases, marginal cost increases, reaches a maximum, and then falls.
a. true
b. false

Q11. Which of the following is the best example of variable cost?
a. depreciation on a building
b. property taxes
c. wages
d. rent paid for one's building

Q12. If the AVC is $12, the AFC is $4, the AR is $20, and output is 6,000 units, the total profit is
a. $72,000
b. $48,000
c. $24,000
d. negative $96,000

Q13. Under perfect competition, if a firm is suffering a loss,
a. MR exceeds ATC
b. AR equals AVC
c. AR equals ATC
d. AR is less than ATC

Q14. Elaine's firm is in a perfectly competitive industry. Why doesn't Elaine try to sell more of her product by lowering its price below the market price?
a. her demand curve is not elastic
b. doing so would be considered unethical price chiseling
c. her competitors would not allow it
d. she can sell all she wants at the market price

Q15. In the long run, perfect competition results in firms producing
a. at the minimum point of their long-run average cost curves, which indicates allocative efficiency
b. where price equals marginal cost, which indicates economic efficiency
c. where price equals marginal cost, which indicates the optimal scale of operation
d. at the minimum point of their long-run average cost curves, which indicates economic efficiency

Q16. On a graph of average cost curves, the space between ATC and AVC represents AFC.
a. true
b. false

Q18. If MC equals MR at a point greater than ATC, the perfectly competitive firm will
a. sustain a loss
b. shut down
c. make an economic profit
d. expand output

Q19. Since all producers have the same average revenue under conditions of perfect competition, they all have the same profits in the short run.
a. true
b. false

Q20. If the entry of new firms in a perfectly competitive industry substantially increases the market demand for resources,
a. this reduces the market price of resources
b. this raises the market price of resources
c. the market price of resources does not change
d. this lowers the ATC curves of individual firms

Q22. Under conditions of perfect competition, profits exist whenever AR is above AVC at equilibrium output.
a. true
b. false

Q23. Under perfect competition, market price is determined by market demand and supply.
a. true
b. false

Q24. If one firm in a perfectly competitive industry is somehow able to produce at a lower cost than competing firms in the short run,
a. the competing firms will adopt similar production techniques in the long run
b. the more efficient firm will earn higher profits than the competing firms in the long run
c. the competing firms will earn higher profits than the more efficient firm in the short run
d. the competing firms will go out of business in the long run

I have been asked to write an introduction to a presentation that we have to do as a group, my part is to write an introduction and present it! Case 2: Near-Empty Restaurants and Off-Season Miniature Golf on p. 287 With the understanding of fixed and variable costs and what those mean to a business in both the short run and the long run, address the following questions in your analysis: Why does it makes sense for an airline to offer discounted fares to students, senior citizens, or some other group, when those fares are lower than the average cost per passenger? Would it make sense to offer deeply discounted fares, such as a $59 ticket from Los Angeles to San Francisco, 1 hour before departure? Why? Does it make sense for a restaurant to offer early-bird specials and senior citizen discounts? Explain your answers in terms of the economic concepts of marginal revenue and marginal cost, as applicable

CASE 2 "

Near-Empty Restaurants and Off-Season Miniature Golf empty? Why you might h Have you ever walked into a restaurant for lunch and found it almost to stay open? It might seem that the revenue from so asked, do the restaurants even bother to possibly cover the cost of running the restaurant. customers could not in deciding whether to. open for lunch, a restaurant owner must keep in mind the distinction between fixed and variable costs. Many of a restaurant's costs the rent, kitchen equipment, tables, plates, silverware, and so on are fixed. Shutting down during lunch would not reduce these costs. In other words, these costs are sunk in the short run. When the owner is deciding whether to serve lunch, only the variable costs the price of the additional food, and the wages of the extra staff are relevant. The owner shuts down the restaurant at lunchtime only if the revenue from the few lunchtime customers fails to cover the restaurant's variable costs. An operator of a miniature golf course in a summer resort community faces a similar decision. Because revenue varies substantially from season to season, the firm must decide when to open and when to close. Once again, the fixed costs the costs of buying the land, and building the course is irrelevant in making this short-run decision. The miniature-golf course should be open for business unify during those times of the year when its revenue exceeds its variable costs."

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