June 15, 2024 

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HEDGE FUND: A mutual fund that relies heavily on hedging practices to protect the value of the financial assets. Such a fund specializes in options, futures, and other financial instruments that provide insurance protection against price fluctuations, and thus limits the risk of loss.

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In terms of the macroeconomic analysis of the aggregate market, a period of time in which all prices, especially wages, are flexible, and are able to achieve equilibrium levels. This is one of two macroeconomic time designations; the other is the short run. Long-run wage and price flexibility means that ALL markets, including resource markets and most notably labor markets, are in equilibrium, with neither surpluses nor shortages. Wage and price flexibility and the resulting resource market equilibria are the reason for the vertical long-run aggregate supply curve.
In macroeconomics, the long-run is a period time in which wages and prices are flexible and resource markets are in equilibrium. In contrast, the short-run is a period time in which wages and prices are inflexible and resource markets are not in equilibrium.

How Long is the Short Run?

The difference between the short-run and the long-run in the macroeconomic analysis of the aggregate market is at the center of a great deal of controversy surrounding alternative stabilization policies. In particular, the debate rages over how long the short run lasts. Or to put it another way, how long does it take for wages and prices to adjust to equilibrium in ALL markets.
  • A Very Short Short Run: At one end of the controversy are those who contend, for all practical purposes, that there is NO short run; that wages and prices adjust almost instantaneously; or at least that they adjust more quickly than any intervention by government. This viewpoint, consistent with that of many political conservatives, suggests that government policies aimed at correcting business-cycle instability are largely unneeded. The economy quickly and automatically adjusts to equilibrium, eliminating any business-cycle problems such as inflation and unemployment. This view further contends that any government attempts to address business-cycle instability are very likely to worsen the situation.

  • A Very Long Short Run: At the other end of the controversy are those who contend, for all practical purposes, that the short run lasts a long, long time, perhaps indefinitely; that wages and prices adjust very, very slowly; or that government intervention works more quickly than the automatic adjustment. This viewpoint, consistent with that of many political liberals, suggests that government policies aimed at correcting business-cycle instability are the best way to promote the economy's health. While markets might adjust to equilibrium, eventually, in the meantime, people suffer the hardships of unemployment and inflation.

It Depends

This controversy is likely to persist, in part because conservatives and liberals have different viewpoints and in part because there is no definitive measure of the short-run duration. This lack of definitive measurement results because the economy adjusts differently under different circumstances. And these circumstances depend on a couple of factors.
  • Size of Disruption: One factor is the extent of the disruption. A big disruption takes longer to adjust than a smaller one. The Great Depression of the 1930s was an enormous disruption that took a long time to adjust. The short run lasted over a decade. In contrast, most "normal" business-cycle contractions are smaller disruptions and the resulting adjustment is much quicker, in the range of 6-18 months.

    In essence, the short run is analogous to the time it takes Duncan Thurly to walk from his house to his job at the Ambling Institute of Technology. If he lives a few blocks away, the trip is a short one. If, however, his residence is on the other side of town, his trip is longer.

  • Structure of Economy: Another factor is the underlying structure of the economy. A given disruption in the economy takes shorter to adjust if the underlying structure of the economy is healthy and efficient than if it is besieged with other problems. An economy that is exceedingly complex, with low worker productivity, stifling government regulation, limited technological innovation, political turmoil, crumbling transportation infrastructure, and low consumer confidence, remains in the short run longer than an economy that fares better in each of these areas.

    In essence, Duncan's short run trip from home to school also depends on health (does he have a broken leg? is he a world class athlete?), the condition of the terrain (is his way blocked by jagged cliffs or raging rivers? does he have access to a smooth sidewalk? is it downhill all of the way?), and even access to transportation (does he have a bicycle? how about a car?)

The Long-Run Aggregate Supply Curve

Long-Run Aggregate Supply Curve
Long-Run Aggregate Supply Curve
The long run macroeconomic time frame is represented by the long-run aggregate supply curve. The exhibit to the right displays a typical long-run aggregate supply curve, labeled LRAS. The distinguishing feature is that this curve is actually a vertical line. This verticality means that the supply of real production is unaffected by the price level. The price level can be high or low, but the same real production is offered for sale.

Moreover, because flexible prices ensures that resource markets are in equilibrium, the quantity of real production supplied is that achieved at full employment--that is, full-employment real production. In the long run, prices can rise or fall, but full employment is maintained and full-employment real production is supplied.

A Word About Business Cycles

Having made the case for NO clear-cut time period for the short run, note that business-cycle instability documented over the years suggests that the short run tends to have a duration of at least one year and generally no more than three or four. In particular, a business-cycle contraction generally hangs around for six months to a year before a recovery begins. It takes another six months to a year before the economy returns to its pre-contraction level of prosperity.

Both Runs Together

The distinction between short run and long run is usually employed primarily for analytical convenience. In particular, it is often helpful to analyze the short-run supply response to changes in aggregate demand separately from the long-run response. This is the essence of the scientific method--divide and conquer, focus on specific principles.

In reality, however, the short-run response and the long-run response occur simultaneously. A decrease in aggregate demand, for example, is bound to create resource market imbalances and unemployment in the short run. This is also likely to trigger changes in resource prices that eventually eliminate the imbalances and restore full employment. The long-run response just takes longer and it might not be fully achieved before a subsequent increase in aggregate demand initiates an alternative long-run response.


Recommended Citation:

LONG RUN, MACROECONOMICS, AmosWEB Encyclonomic WEB*pedia,, AmosWEB LLC, 2000-2024. [Accessed: June 15, 2024].

Check Out These Related Terms...

     | short-run, macroeconomics | aggregate supply | aggregate supply curve | aggregate supply determinants | aggregate supply | aggregate market analysis | aggregate market | short-run aggregate supply | long-run aggregate supply | long-run, microeconomics |

Or For A Little Background...

     | macroeconomics | resource markets | gross domestic product | macroeconomic theories | macroeconomic markets | macroeconomic sectors | full employment | unemployment | flexible prices | political views |

And For Further Study...

     | change in aggregate supply | change in real production | aggregate supply shifts | slope, long-run aggregate supply curve | slope, short-run aggregate supply curve | short-run aggregate supply and market supply | business cycles | circular flow | Keynesian economics | monetary economics |

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