Long run in macro- and microeconomics

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:39

Long-term is a concept in economics that characterizes a rather long period of time during which a change in all factors of production can occur and a new economic equilibrium can be established. Often used in business analysis.

In microeconomics, this is the period during which the firm is able to change the volume of production and production factors in order to adapt to the changing situation in the market and in the world. In macroeconomics, this is the long period necessary to achieve equilibrium (in the long run) between production and the price level. The ancestor of the concept is Alfred Marshall.

What is the short term?

Let's take a closer look. The long-term period is opposed to the short-term - the period of time during which the firm changes production volumes without a significant transformation of the basic factors of production. They are called permanent or immutable. These include capital equipment, land, qualified personnel and some others. Variable factors include auxiliarymaterials, raw materials, employees, energy.

Production in the long run

The need to change the underlying factors is a common feature of the scientific and technological revolution. The constant tightening of environmental standards, increasing requirements for the quality of manufactured products, increased competition from other manufacturers and the unstable political situation in a number of countries from which raw materials are purchased are forcing changes in the chains of economic and industrial relations. Those who adapt more often win and make big profits in the long run.

To do this, one has to purchase more energy-efficient and advanced equipment, build new enterprises, attract progressive specialists or retrain existing ones. It is not always possible to do this quickly.

In the long run, the firm makes strategic decisions. They relate to the expansion or reduction of the scale of production, change of industry orientation, modernization and reorganization of production activities.

Equally important is the issue of costs. Long-term costs are associated with the purchase of new equipment, staff training, establishing new industrial relations, and sometimes with investments in new technical developments or the extraction of raw materials.

Temporal boundaries

The long term is generally much longer than the short or medium term. However, indifferent branches of economic activity and different organizations it is not the same.

So, in the aerospace industry, its duration is 2-3 years, and in the energy industry, even a short-term one can last more than 10 years. The transition of energy companies from hydrocarbon to renewable energy requires a complete change in all logistics, infrastructure, operating principles, equipment, replacement or radical retraining of employees. Despite the ambitious plans of many companies, they plan to carry out such a transformation no earlier than 2040–2050 of the 21st century.

Slightly easier, but also not easy, is the transition from the production of gasoline and diesel cars to electric or hydrogen vehicles. Some firms make a radical replacement of equipment and production lines, others, in general, destroy the old enterprises, replacing them with new ones. All this requires a lot of money and effort, but time dictates its conditions. Gradually, the oil lobby is weakening, and companies, albeit with difficulty, but succumb to the onslaught of modern realities and change plans.

Do nothing?

If radical steps are not taken with the accelerated replacement of equipment and personnel, then the long-term period is the time that will pass before the existing equipment becomes unusable, the termination of current contracts. Each company has a different time period. And it is not well-defined, since different factors may lose relevance at different times. Some firms can fail over the long term.

Short term feature

During the short-term period, it is rather difficult to sharply increase output. To do this, you will have to operate the existing equipment as intensively as possible, increase the purchase of raw materials, organize overtime work, and hire new employees.

However, the overall size of production and quality of products, as well as its cost, will remain virtually unchanged. It will be possible (and even then not always) to slightly increase the volume of output. If the enterprise has accumulated stocks of products, then it can increase their supply to the market for some time. As they are depleted, this opportunity will decrease.

Long term planning

Macroeconomic indicators largely depend on the decision of the federal authorities. Long-term planning is an important component of the sustainable development of the country and its production activities. Five-year plans, the so-called five-year plans, are often used. The farthest boundary of long-term planning is usually 2050.

Long-term programs vary widely across countries. For example, Saudi Arabia plans to diversify its economy through the development of deep oil refining, petrochemical production and renewable energy. China and the EU countries intend to gradually abandon coal, develop electric transport and renewable energy sources. In the US, long-termprograms vary from state to state. An increasing number of them are planning to phase out the use of hydrocarbons. Russia, on the other hand, is very conservative in this regard and does not plan any radical changes.