Business Strategy: Short-Run vs. Long-Run Production Examples

📚 Quick Study Guide

• ⏱️ Short Run: A period where at least one input is fixed (usually capital). Firms can only adjust variable inputs like labor and materials.
• 🏭 Long Run: A period where all inputs are variable. Firms can adjust their scale of operations by changing all inputs.
• 💸 Short-Run Costs: Include both fixed costs (costs that do not vary with output) and variable costs (costs that change with output).
• 📈 Long-Run Costs: All costs are variable, and firms aim to achieve economies of scale.
• 📐 Production Function (Short Run): $Q = f(L, \bar{K})$, where $L$ is labor (variable), and $\bar{K}$ is capital (fixed).
• 🌱 Production Function (Long Run): $Q = f(L, K)$, where both $L$ and $K$ are variable.
• 💡 Economies of Scale: Occur when increasing all inputs leads to a more than proportional increase in output, reducing average costs.

🧪 Practice Quiz

1. Which of the following is a characteristic of the short run in production?
   1. A) All inputs are variable.
   2. B) At least one input is fixed.
   3. C) Firms can freely enter and exit the market.
   4. D) There are no fixed costs.
2. In the long run, what is true about a firm's inputs?
   1. A) All inputs are fixed.
   2. B) At least one input is fixed.
   3. C) All inputs are variable.
   4. D) Capital is always fixed.
3. Which of the following is an example of a short-run production decision?
   1. A) Building a new factory.
   2. B) Hiring additional workers for a temporary project.
   3. C) Investing in new equipment.
   4. D) Closing down a plant.
4. What is the key difference between fixed costs and variable costs?
   1. A) Fixed costs change with output, while variable costs do not.
   2. B) Fixed costs do not change with output, while variable costs do.
   3. C) Fixed costs are only present in the long run.
   4. D) Variable costs are only present in the short run.
5. Economies of scale are a characteristic of which production period?
   1. A) Short run
   2. B) Long run
   3. C) Both short run and long run
   4. D) Neither short run nor long run
6. Which of the following represents the short-run production function?
   1. A) $Q = f(L, K)$
   2. B) $Q = f(L, \bar{K})$
   3. C) $Q = f(\bar{L}, K)$
   4. D) $Q = L + K$
7. A company is deciding whether to lease additional office space or not. Is this typically a short-run or long-run decision?
   1. A) Short-run
   2. B) Long-run
   3. C) Depends on the industry
   4. D) Neither