Economics and the 2008 crisis: a Keynesian view
Economics and the 2008 crisis: a Keynesian view

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Economists and time

A decision to offshore or outsource production involves a significant reorganisation of a firm’s production processes, involving new production sites and potentially closure of existing ones. There is always a period of time in which some things cannot be changed, like the location of production activity, or it may take time to train and recruit the appropriate labour needed for production. Microeconomists use the concept of a short run and long run to define two periods of time. In microeconomics:

  • In the short run, at least one input of production is fixed, and cannot be changed.
  • In the long run, all inputs of production can be changed.

This simple distinction between short and long run is helpful for thinking about the different ways firms can manage costs. In the long run, the firm has the opportunity to achieve the minimum cost available as it can change its input of labour, capital, land, energy etc. to improve the efficiency of the firm. In the short run, some factor inputs are fixed, so the firm must make do.

One problem with making a distinction between two time periods is that in reality the firm is always operating in the short run whilst making plans for the long run. Once long run plans are realised, they become part of the short run situation of the firm: the firm plans for the future again, and so the process continues. This can make the distinction between the short run and long run appear blurred.

The short run and long run capture the situation of a firm at a particular point in time. The short run and long run are theoretical concepts, designed to help model the behaviour of firms. They are particularly helpful in an economic model describing how costs can be expected to vary for a typical or representative firm. This model is referred to as a cost curve.

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