Short Run

The short run is a period of time in which at least one input in the production process
is fixed, while other inputs can be varied. This fixed input is often referred to as a
fixed factor of production, and it typically includes items such as machinery,
equipment, and plant size. Since the fixed factor cannot be easily changed in the
short run, firms must adjust their production levels by altering the quantities of
variable inputs, such as labour and raw materials.

Long Run

In contrast, the long run is a period of time in which all inputs in the production
process are variable. This means that firms have the flexibility to adjust all factors of
production, including capital, in response to changes in demand, technology, or other
economic conditions. In the long run, firms can expand or contract their production
capacity, adopt new technologies, and make other strategic decisions that may not
be feasible in the short run.

Key Differences

The key difference between the short run and the long run lies in the ability of firms
to adjust their production capacity and make strategic decisions. In the short run,
firms are constrained by the fixed factors of production, which limits their ability to
respond to changes in the market. However, in the long run, firms have more
flexibility to adapt their production processes and make long-term investments,
allowing them to respond more effectively to economic changes.

SNP – short run / perfect competition

Meaning of short run, meaning of perfect competition

Firms in a perfectly competitive market will maximize their profits by

producing the quantity where marginal revenue (MR) equals marginal cost
(MC). MR is the additional revenue that a firm receives from selling one more
unit of output, while MC is the additional cost that a firm incurs from producing
one more unit of output. If price is greater than AC firms earns super normal
profits. SNP in P.C is typically temporary because market is self-correcting. the
entry of firms to SNP ultimately eliminates these SNP.

The price output determination if a perfectly competitive market

can be understood with the help of cost curves, revenue curves
Short run
CASE 1 SNP
 X axis measures the level of output/ quantity and y axis the price/cost
 DD Is the demand curve that shows the demand of output at different
price points and SS is the supply of products
 Point E is the equilibrium because that is the point where the demand
curve and supply curve intersects.
 In equilibrium the qty of a good supplied by producers equals the qty
demanded by the consumers . equilibrium Is the only price where qty
demanded is equal to qty supplied
 Hence, EQ is eqillibrium qty and EP is the equilibrium price
 FIRM
 X axis measures the level of output/ quantity and y axis the price/cost
 SAC is short run avg cost curve and it indicates cost incurred per unit of
output
 SMC is short run marginal cost which indicates cost incurred to produce
one additional unit of output /qty
 The horizontal straight line is the price line or , price in demand
curve ,average revenue(AR) and marginal revenue (MR) which extends
from the equilibrium point of the industry as in P.C firms are price takers
 The Firm reaches equilibrium at point E where MR=MC and hence takes
the industry price . EP is the equilibrium price extending from point E to
Y axis and EQ is the equilibrium quantity or output extending from point
E to X axis.
 E1 is the point which is extended from the equilibrium point to the SAC
curve . so for every unit there is going be the difference which is plotted
on the graph E and E1 .
 E1C is the equilibrium cost which is extending from E1 on the Yaxis
 As the cost ( EC1) is less than the price EP the shaded area demonstrates
SNP
 EQ is the equilibrium qty extending from point E on X axis
 So at point E the firm will produce EQ qty at cost E1C with price being EP

CASE 2 NORMAL PROFIT

Meaning of short run, PC
The concept of normal profits in a perfectly competitive market can be
illustrated using a graph that shows the firm's marginal revenue (MR), marginal
cost (MC), average total cost (ATC), and average variable cost (AVC) curves.
Normal profits are a key concept in the study of perfect competition. They
represent the minimum amount of profit that a firm must earn in order to cover
its costs and remain in the market. The existence of normal profits helps to
maintain market equilibrium and ensures that firms are able to survive in the
long run.

 X axis measures the level of output/ quantity and y axis the price/cost
 DD Is the demand curve that shows the demand of output at different
price points and SS is the supply of products
 Point E is the equilibrium because that is the point where the demand
curve and supply curve intersects.
 In equilibrium the qty of a good supplied by producers equals the qty
demanded by the consumers . equilibrium Is the only price where qty
demanded is equal to qty supplied
 Hence, EQ is eqillibrium qty and EP is the equilibrium price

FIRM
 X axis measures the level of output/ quantity and y axis the price/cost
 SAC is short run avg cost curve and it indicates cost incurred per unit of
output
 SMC is short run marginal cost which indicates cost incurred to produce
one additional unit of output /qty
 The horizontal straight line is the price line or , price in demand
curve ,average revenue(AR) and marginal revenue (MR) which extends
from the equilibrium point of the industry as in P.C firms are price takers
 The Firm reaches equilibrium at point E where MR=MC and hence takes
the industry price . EP is the equilibrium price extending from point E to
Y axis and EQ is the equilibrium quantity or output extending from point
E to X axis.
 The SAC curve cuts the SMC curve and the price line at the equilibrium
point E itself
 As the AC curve cuts the MC and MR curve at the same point of
equilibrium . therefore, EP and EC lies on the same point on Y axis when
extended through point E .
  a perfectly competitive firm will produce a quantity where the price equals
marginal cost (P = MC). This is the point where the firm is maximizing its
profits. At this point, the firm is also producing at the minimum point of the
average total cost (ATC) curve. This means that the firm is producing the
quantity of output where the cost of producing one more unit of output is equal
to the average cost of producing all units of output.

CASE 3 – LOSS

Meaning of short run, PC

In a perfectly competitive market, firms can experience losses in the short run when
the market price of their product is less than their average total cost (ATC).

 X axis measures the level of output/ quantity and y axis the price/cost
 DD Is the demand curve that shows the demand of output at different
price points and SS is the supply of products
 Point E is the equilibrium because that is the point where the demand
curve and supply curve intersects.
 In equilibrium the qty of a good supplied by producers equals the qty
demanded by the consumers . equilibrium Is the only price where qty
demanded is equal to qty supplied
 Hence, EQ is eqillibrium qty and EP is the equilibrium price
FIRM

 X axis measures the level of output/ quantity and y axis the price/cost
 SAC is short run avg cost curve and it indicates cost incurred per unit of
output
 SMC is short run marginal cost which indicates cost incurred to produce
one additional unit of output /qty
 The horizontal straight line is the price line or , price in demand
curve ,average revenue(AR) and marginal revenue (MR) which extends
from the equilibrium point of the industry as in P.C firms are price takers
 The Firm reaches equilibrium at point E where MR=MC and hence takes
the industry price . EP is the equilibrium price extending from point E to
Y axis and EQ is the equilibrium quantity or output extending from point
E to X axis
  The AC curve cuts the MC curve from above and does not touch the MR
curve
 So for every unit the firm is selling the amount received is comparatively
less than the cost of producing every unit
 E1 is the point which lies on the AC curve when extended throught point
E where MR=MC
 EC denotes the cost of production of every unit at the point of
eqillibrium where MR=MC and it is denoted by extending the line from
point E1 to Y axis
 As EP is greater than EC the shaded region in the graphs shows loss
 The equilibrium point for the firm is where MR intersects MC. At this point, the
firm is producing the quantity of output that maximizes its profits or minimizes
its losses. In this case, the firm is incurring losses because the market price
(P) is below the ATC

LONG RUN EQULIIBRIUM

Meaning of long run, P.C
a perfectly competitive market, firms earn normal profits in the long run. This means that
their total revenue equals their total costs, including both explicit and implicit costs. Normal
profits are not a reward for success; they are simply the return that a firm earns or its
owners' investment of capital and its managers' labour and expertise.

In the long run, firms in a perfectly competitive market are free to enter or exit the
industry. If a firm is earning supernormal profits, this will attract new firms into the
industry. This will increase the supply of the product, which will drive down the
market price. As the market price falls, the supernormal profits of the existing firms
will be eroded, and eventually, all firms in the market will earn only normal profits.

 X axis measures the level of output/ quantity and y axis the price/cost
 DD Is the demand curve that shows the demand of output at different
price points and SS is the supply of products
 Point E is the equilibrium because that is the point where the demand
curve and supply curve intersects.
 In equilibrium the qty of a good supplied by producers equals the qty
demanded by the consumers . equilibrium Is the only price where qty
demanded is equal to qty supplied
 Hence, EQ is eqillibrium qty and EP is the equilibrium price and the price
line is extended to the firm as firms are price takers this horizontal line is
the MR/P/AR curve
  The Firm reaches equilibrium at point E* where MR=MC and hence takes
the industry price . EP* is the equilibrium price extending from point
E*to Y axis and E*Q is the equilibrium quantity or output extending from
point E to X axis.
 B is the point which is extended from the equilibrium point to the LAC
curve . so for every unit there is going be the difference which is plotted
on the graph E* and B .
 EC* is the equilibrium cost which is extending from B on the Yaxis
 As the cost ( EC*) is less than the price EP* the shaded area
demonstrates SNP
 E*Q is the equilibrium qty extending from point E* on X axis
In the long run, firms in a perfectly competitive market are free to enter or exit the industry. If
a firm is earning supernormal profits, this will attract new firms into the industry. This will
increase the supply of the product, which will drive down the market price. As the market
price falls, the supernormal profits of the existing firms will be eroded, and eventually, all
firms in the market will earn only normal profits

 Because of increase in supply which is denoted by a rightward shift of

the SS supply curve to S1S1 supply curve and the DD demand curve
remains unchanged
 A new equilibrium E1 is formed where the DD and S1S1 curve intersects
 At this new equilibrium E1Q1 is the new qty to be produced and E1P1 is
the new price.
 The dotted price line is again extended as firms are price takers . this
new dotted line when extended forms new MR curve .
FIRM
 X axis measures the level of output/ quantity and y axis the price/cost
 LAC is long run avg cost curve and it indicates cost incurred per unit of
output
 LMC is short run marginal cost which indicates cost incurred to produce
one additional unit of output /qty
 The horizontal straight line is the price line or , price in demand
curve ,average revenue(AR) and marginal revenue (MR)
 The Firm reaches equilibrium at point E1* where MR=MC and hence
takes the industry price . E1P* is the equilibrium price extending from
point E1* to Y axis and E1Q* is the equilibrium quantity or output
extending from point E1* to X axis.
 The LAC curve cuts the LMC curve and the price line at the equilibrium
point E1* itself
 As the LAC curve cuts the LMC and MR curve at the same point of
equilibrium . therefore, E1P* and E1C* lies on the same point on Y axis
when extended through point E1* .
 In this way firms earns normal profit in the long run