I have been trying to google it for the last 2 hours for an explanation and I really don’t understand it. Does it have to do with certain companies seeing changes in the near or far future, depending on the industry? Anything helpful will be appreciated.
In: Economics
The main difference is what can be changed inside the model that you are studying. Basically in short run you can change only limited amount of factors. Depending on what model you have it will vary.
For example if you talk about company that decide how much they want produce you will have variable cost (usually for labor) and fixed cost (usually capital). In long run you can change both factors.
Another situation: in the model of perfect competion companies can have profits in short run, but in the long run their profit is equal to zero, since long run allows new firms to enter.
Short run probably refers to very quick actions taken by the actors. For producers, for example, if demand reduces, they can furlough workers, reduce shifts, etc. If demand increases, they can hire more workers etc. These actions can be put into effect fairly quickly (weeks, months) but there are obviously limits (factories cannot run more than 24hrs/day, equipment cannot run beyond their designed speed). Different actors in the economy can take various actions in the short run.
In the long run, the actors can enter or exit industries, shut down factories or build new ones. Invest in new technology, design new products etc etc. These typically means a “permanent” adjustment to the available supply or cost of production. And they also typically take a long period to take effect (years)
Since the economy consists of many linked components (a factory both supplies and purchases from others) in a network, in the long run, the entire network adjusts to the new equilibrium.
There is no fixed definition of what consists of a short run effect or long run effect. These are conceptual ideas designed to help analyze behavior of the players.
Short run means fast money. Winning the lottery, or fast jumps in stock prices. It also comes with higher risk of money loss. You usually don’t win the lottery twice.
Long run is more stable, and has smaller returns over long periods that add up to more money overall. Americans don’t like patience of long run. Japanese like stable predictability of long run.
This is an extremely short answer that I hope gets you started. The US system is dominated with C level managers (CEO, CFO…) who came from the banking industry. So, they are more used to appeasing shareholders who demand high returns and favor jumping from stock to stock, chasing the next big thing. By contrast, Japanese companies value long term loyalty to companies and dont value experience gained in one company after you leave it. For example, if you work as an accountant for 15 years with company A, and quit to look for another job. Company B will not consider you as an accountant with 15 years of experience. Rather they will consider you as a newly graduated employee that shows a lack of loyalty. But, they rarely fire employees, extending the same loyalty to their charges. That mentality extends to their financial decision as well. They don’t jump from one stock to the next. They don’t consider a 20% return as a good thing, because that includes a chance of a 20% loss the next year.
With that framework, all macroeconomic decisions can be effected by similar consequences. If you make government policy, it can effect the economy in both long term and short term ways. Tax cuts usually only benefit an economy for the first year because the savings will be zero the next year when compared with the previous year. That is a short run situation. But, Eisenhower building the nations interstate highway system was a long run situation that still has cost and huge benefits today. Every government decision, or economists evaluation of that decision, must include calculations for BOTH the short term and the long term effects. Trumps tax cut had a huge benefit on the short run, but will carry a higher overall cost in the long run.
Hope this helps.
In the short run you can calculate some of your costs as a constant value. For example, maybe you pay an employee $15/hr. But in the long run you need to factor in the increase in wages, materials, etc.
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