Question

Explain the difference between a short-run and long-run production function. Cite one example of this difference in a business situation.

Answer 1

Short-run is a situation in which a firm can alter the level of only the variable inputs and not the fixed inputs. However, in the long-run a firm can alter all inputs i.e. the fixed inputs as well as the variable inputs.

For example, a firm can alter the number of workers to be employed or the amount of raw materials to be used in the production in the short-run. However, it cannot alter the fixed inputs like plants, machinery, etc. in the short-run. In the long-run, a firm can alter all these inputs i.e. no. of workers, materials required, plants, machinery, production facilities, etc.