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 corn crop. d. An Alcoa aluminum plant adds a third shift of workers.

Short answer

a. Long-run; b. Short-run; c. Short-run; d. Short-run.

Step-by-step solution

Understanding Short-Run vs. Long-Run

In economics, the short run refers to a period during which at least one of a firm's inputs is fixed, typically physical capital like buildings or machinery. In contrast, the long-run is a period where all inputs can be adjusted, allowing for changes such as constructing new facilities.

Step for Option a: Analyzing Wendy's Building a New Restaurant

Building a new restaurant involves acquiring new physical capital and is considered a long-run adjustment, as fixed inputs like buildings can’t be changed in the short-run.

Step for Option b: Evaluating Harley-Davidson's Employment Increase

Hiring more production workers can be a short-run adjustment because labor can typically be varied quickly, without altering fixed capital inputs.

Step for Option c: Reviewing the Farmer's Use of Fertilizer

Increasing the amount of fertilizer is a short-run adjustment, as it involves changing a variable input while keeping land, which is generally fixed, constant.

Step for Option d: Considering Alcoa's Third Shift

Adding a third shift of workers is a short-run adjustment because it utilizes existing physical capital more intensively without changing the fixed capital.

Key concepts

Short-Run Adjustments

In economics, the concept of short-run adjustments is all about flexibility with some constraints. During this period, businesses can tweak some of their inputs, specifically variable ones, like labor or materials, but others, such as machinery or buildings, remain constant. This situation arises because certain assets are costly or time-consuming to adjust.

For example, Harley-Davidson hiring 200 more production workers is a classic case of a short-run adjustment. The company can quickly vary the number of workers they employ without having to immediately invest in new machinery or expand factory space. Similarly, Alcoa adding a third shift of workers to its aluminum plant also exemplifies a short-run adjustment. The company uses its existing infrastructure more efficiently to boost production without building new facilities. In both scenarios, the fixed input remains unchanged, emphasizing how businesses respond to immediate production needs without altering long-term commitments.

Long-Run Adjustments

Long-run adjustments in economics involve reshaping the scale of operations without constraints on inputs. This phase provides firms the leeway to modify all factors of production, allowing comprehensive changes.

Take Wendy's building a new restaurant, for example. This represents a long-run adjustment because it involves a decision to invest in new buildings and infrastructure. Constructing a new restaurant involves commitments that cannot be easily reversed in the short run. In doing so, Wendy’s expands its physical presence and capacity, indicating a strategic decision to enhance its operational scale over time.

Whenever businesses decide to change their capacity, like acquiring new facilities or fundamentally altering the scale of their operations, they are engaging in long-run adjustments aimed at optimizing their competitive position over an extended period.

Fixed Inputs

Fixed inputs are those elements of production that cannot be easily changed in the short run. These inputs remain constant despite changes in the level of output. Typically, fixed inputs include assets like buildings, machinery, and land, which require significant time and investment to alter.

In the case of the farmer increasing fertilizer usage on his corn crop, the land itself represents a fixed input. While the amount of land remains the same, the farmer can adjust how intensively this land is used by varying the quantity of fertilizer, a variable input. The fixed nature of land indicates that it cannot be increased or decreased quickly or cheaply, highlighting the rigidity some business inputs exhibit in response to demand.

Variable Inputs

Variable inputs are those resources that can be adjusted in the short run to meet the desired level of output. Unlike fixed inputs, these can be varied relatively easily and quickly, adapting to production needs without significant alteration of ongoing commitments.

For instance, when Harley-Davidson hires an additional 200 production workers or Alcoa adds a new shift for its workers, these adjustments involve variable inputs. Labor, in these contexts, is a variable input as it can be increased or decreased with relative ease compared to investments like new factory buildings or machinery.

Variable inputs allow businesses the flexibility to respond to changes in market demand, supporting short-term goals and maintaining operational efficiency without requiring the same degree of capital commitment or time as fixed inputs.