Question

It is clear that businesses operate in the short run, but do they ever operate in the long run? Discuss.

Short answer

Firms will operate in the long run regardless of the costs paid; they will fall into the variable cost category.

Step-by-step solution

Step 1. Introduction

The long run is defined as a span of time during which no production occurs and there are no obstacles to entry or leave from an industry.

The term "short run" refers to a time span in which some aspects are constant while others are variable, and there are restrictions on entering or exiting an industry.

Step 2. Explanation

In the near run, both fixed and variable costs exist. Fixed costs are costs that stay constant regardless of output volume.

Variable costs are those that change depending on the production. As with labor, rent, and other expenses, the higher the production, the higher the cost.

In the long run, the corporation will use alternative technologies for its input in order to produce a high-quality output. The companies will its way to manufacture to its lowest cost possible and that's when economies of scale come to play.

A business that is profitable in the short term may be profitable in the long run if it can find a way to operate with a lower-cost alternative technology.

Because production increases, the average cost decreases, the company will need to increase its productivity.

So, in the end, firms will operate in the long run regardless of the costs paid; they will fall into the variable cost category.