Question

Which of the following are short-run and which are long-run adjustments? a. Wendy's builds a new restaurant. b. Harley-Davidson Corporation hires 200 more production workers. c. A farmer increases the amount of fertilizer used on his com crop. d. An Alcoa aluminum plant adds a third shift of workers.

Short answer

a. Long-run adjustment, b. Short-run adjustment, c. Short-run adjustment, d. Short-run adjustment.

Step-by-step solution

Understanding Short-Run and Long-Run Adjustments

In economics, short-run adjustments are those where at least one factor of production is fixed, usually physical capital like buildings and machinery. Long-run adjustments are those where all factors of production can be varied, meaning no fixed factors.

Analyzing Wendy's New Restaurant

Building a new restaurant involves significant changes in physical capital. Since this is a change in a firm's existing capacity through a new building, it typically requires planning, construction, and capital expenditure. This is a long-run adjustment because it involves changes to fixed factors of production.

Evaluating Harley-Davidson's Hiring Decision

Hiring more production workers typically happens without changing the amount of physical capital (like factories or machinery), assuming the existing facilities have capacity. Therefore, this is a short-run adjustment as only labor, a variable factor, is altered.

Assessing the Farmer's Fertilizer Increase

Increasing the amount of fertilizer used does not involve changes to fixed assets like land or infrastructure but boosts variable input. As such, this is a short-run adjustment because only the variable inputs are adjusted.

Considering Alcoa's Third Shift Addition

Adding a third shift of workers means utilizing existing facilities and equipment more extensively. It does not change the physical capital but varies labor usage. Hence, this is a short-run adjustment, as only the variable labor input is adjusted without changing the firm's capacity.

Key concepts

Short-Run Adjustment

In the realm of economics, the term *short-run* refers to a period during which at least one factor of production remains fixed. Typically, in a short-run adjustment, firms alter variable inputs like labor or raw materials, while fixed inputs, such as buildings and heavy machinery, remain unchanged.
This means businesses can react to changes in demand or supply but within the constraints of their existing production capacity. For example, hiring more workers or increasing the number of shifts are common short-run adjustments. These do not require time-consuming changes or expansions in physical capital.
Thus, while a company can increase its output quickly by adjusting variable inputs, the flexibility is limited by the capacity of its fixed inputs.

Long-Run Adjustment

When we refer to a *long-run* adjustment in economics, we talk about a timeframe where all factors of production are variable. This allows firms to adjust not just labor or raw materials, but also to scale or modify their physical infrastructure.
Long-run adjustments involve significant changes, such as building new facilities or purchasing new machinery. These transformations require more time and financial investment, as they change the firm's production capacity. An example is a company building a new branch or expanding its manufacturing plant.
Such changes are often strategic and crucial for a firm seeking to cater to new markets or increase its market share.

Factors of Production

The term *factors of production* encompasses the inputs used by firms to create goods and services. They are fundamental in understanding both short-run and long-run adjustments, as they dictate what can be changed and when:

• **Land**: Represents natural resources and the physical space for production.
• **Labor**: Involves human effort, including both physical and intellectual contributions.
• **Capital**: This includes physical machinery, buildings, and technology used in production.
• **Entrepreneurship**: The innovation and risk-taking needed to bring the other factors together efficiently.

In the short run, changes usually involve adjustments in variable factors like labor. However, in the long run, all factors, including physical capital, can be modified.

Physical Capital

*Physical capital* refers to the tangible assets that a company uses to produce goods and services. This includes buildings, machinery, and technology. It is a crucial component of production that often dictates the ability of a company to expand its operations.
In the short run, physical capital is considered fixed due to the time and financial resources required to alter or expand it. This means while labor and materials can be adjusted quickly, buildings and machinery changes demand long-term planning and investment.
In the context of long-run adjustments, firms might build new facilities or upgrade equipment to enhance their production capacity, allowing them to increase overall output and efficiency. This is why physical capital is a significant consideration in understanding strategic economic planning.