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AD: The abbreviation for aggregate demand, which is the total (or aggregate) real expenditures on final goods and services produced in the domestic economy that buyers would willing and able to make at different price levels, during a given time period (usually a year). Aggregate demand (AD) is one half of the aggregate market analysis; the other half is aggregate supply. Aggregate demand, relates the economy's price level, measured by the GDP price deflator, and aggregate expenditures on domestic production, measured by real gross domestic product. The aggregate expenditures are consumption, investment, government purchases, and net exports made by the four macroeconomic sectors (household, business, government, and foreign).
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PRODUCTION TIME PERIODS: Alternative time periods used to differentiate between variable inputs and fixed inputs that are key to the analysis of short-run production and long-run production by a firm. The two primary time periods are short run and long run. Two secondary periods are very short run (market period) and very long run. Time periods are specified based on the number of inputs that are fixed or variable. The specification of production time periods is a convenient way to understand and explain production activity by a firm, which then provides insight into market supply. The standard distinction is generally between short run, with at least one fixed and one variable input, and the long run, with all inputs variable. However, in some cases, the very short run or market period, with all inputs fixed, is the proper time period. And in other circumstances it is useful to consider the very long run, with inputs beyond the control of the firm also variable.The Short and Long of ItThe primary production time period distinction is between the short run and the long run. The short run is the primary focus of analysis when it comes to explaining and understanding market supply and the law of supply. - Short Run: The short run is the production time period in which at least one input under the control of the firm is variable and at least one input is fixed. This time period is relevant for short-run production analysis. In particular, with one fixed and one variable input, the law of diminishing marginal returns guides short-run production and determines how a firm responds to changes in the market price.
- Long Run: The long run is the production time period in which all inputs under the control of the firm are variable. This time period is relevant for long-run production analysis. In particular, with all inputs variable, long-run production is guided by returns to scale rather than marginal returns and the law of diminishing marginal returns.
The Very Short and LongIn addition to the short run and long run, the analysis of firm production often involves shorter and longer periods. Once again, these alternatives are specified based on fixed and variable inputs.- Very Short Run: The very short run, or market period, is the production time period in which all inputs under the control of the firm are fixed. With all inputs fixed, the quantity of output produced is also fixed. In other words, the firm has produced the output and now is concerned only with selling. It cannot produce more or less, it can only sell what it has.
- Very Long Run: The very long run is the production time period in which all inputs are variable, including those under control of the firm and those beyond the control of the firm. During this time period, key production inputs such as government rules, technology, and social customs also change. In most cases, the analysis of the very long run is concerned with how changes in technology affect a firm's production.
No Hard and Fast RulesIt is often convenient to think of the short run as lasting weeks or months before giving way to the long run. In other words, it often takes a firm several months before it is able to change the quantity of fixed inputs, especially capital. Until the quantity of capital is changed, the firm is faced with short-run production choices involving labor and other variable inputs.However, while many real world firms operate in the short run for several months before moving into the long run, there is NO clear-cut designation of how long the short run lasts, which applies to all firms. In other words, the short run and long run (as well as the very short run and very long run) are not absolute time periods comparable to the 24 hours in a day or 365 days in a year. For some firms the short run might last a few days. For other firms the short run can extend for several years. How long the short run continues depends on the production technology used by the firm and how difficult it is to change the quantity of capital and other fixed inputs. A couple of examples might serve to illustrate: - Consider the newspaper route tended by precocious twelve-year-old Penelope Pumpernickel. In the short run, her key variable input is her labor and her key fixed input is her shiny purple bicycle. In the long run, Penelope can change the quantity of her input by adding a second bike which can be used by her precious younger sister Priscilla.
How long would it take Penelope to acquire this extra capital and move from the short run to the long run? Perhaps a day or two if purchased off the floor from a retailer or a month or so if it is manufactured from scratch. In this case, the short run lasts a month or less.
- Another example is provided by Mona Mallard's Duct Tape factory. This 3 million square foot factory makes use of the latest automated, high-tech duct tape manufacturing equipment, with key parts fabricated out of quagliminium, a rare metal found only in the barren mountains of the Republic of Northwest Queoldiolia. It takes a minimum of five years to extract and process quagliminium into a usable form.
How long would it take to expand the productive capital of Mona Mallard's Duct Tape factory? Given the time constraints for quagliminium processing, Mona Mallard can count on at least five years. Should Mona decide to expand duct tape production by adding another 300,000 square feet of factory space and associated equipment today, she will not see any extra output for at least five years. In this case, the short run is five years or more.
All Runs TogetherThe distinction between short run and long run is usually employed for analytical convenience. In particular, the economic analysis of short-run production is best accomplished by specifying one variable input and one fixed input. In so doing, a great deal of insight can be gained.However in the real world, firms are generally less concerned about such theoretical distinctions between the short run and the long run. The reason is that most firms operate in the short run and long run (as well as the very short run and very long run) simultaneously. In other words, a firm is concerned about the day-to-day business of adding variable inputs to fixed inputs, at the same time it is making and implementing plans to change the fixed inputs. It is also seeking to sell the output that has already been produced and adjusting to changes in government regulations. For example, Penelope Pumpernickel continues to deliver newspapers each morning, then spends her afternoons shopping for a new bicycle. During construction of their new 300,000 factory addition, the Mona Mallard continues to produce rolls upon rolls of duct tape in their existing factory.
Recommended Citation:PRODUCTION TIME PERIODS, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: December 5, 2024]. Check Out These Related Terms... | | | | | | | | Or For A Little Background... | | | | | | | | | | | | | | And For Further Study... | | | | | | | | | | | | |
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