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what is the difference between short run supply vs. long run supply? What factors create shortages in the short run, but can be solved in the long run?

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Answer 1

Short run Supply:Means a period of time in which the size of the palnt and machinery is fixed.The increased demand for the commodity is met only by an intensive use of the given plant.A firm produces an output at which if the price is higher than the marginal cost, it will pay the firm to expand its output so as to equal its price.On the other hand, the price is less than the marginal cost, it is incurring a loss, and it will reduce its output till the marginal cost and the price are made equal. Hence, the marginal cost curve of the firm is the supply curve of the perfectly competitive firm in the short-run.

Long run supply:Means a period of time in which all factors of production and costs are variable. In the long run, firms are able to adjust all costs, whereas, in the short run, firms are only able to influence prices through adjustments made to production levels. Additionally, while a firm may be a monopoly in the short term, they may expect competition in the long run.

differences between Long run and short run supply:

s.no	Long run supply	short run supply
1	No fixed factors	both fixed and variable factors
2	Firms can enter and exit	firms can shut down but not fully exit
3	In this producer has the complete freedom tochange its cost	fixed cost cannot be altered

• 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. a sudden rise in demand, may lead to higher prices, but firms don’t have the capacity to respond and increase supply.
• Long Run
• The long run is a situation where all main factors of production are variable. The firm has time to build a bigger factory and respond to changes in demand. In the long run:
  • We have time to build a bigger factory.
  • Firms can enter or leave a market.
  • Prices have time to adjust. For example, we may get a temporary surge in prices, but in the long-run, supply will increase to meet it.
  • The long run may be a period greater than six months/year
  • Price elasticity of demand can vary – e.g. over time, people may become more sensitive to price changes, in short run, people keep buying a good they are used to.