Short run versus long run production

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Table of Contents

Abstract
Difference between shot and long run production
Phenomena of production and cost in short and long-term
Ways of determining the cost of production
Conclusion
References

Abstract

Mistakably people would wonder how long the long run production is and how long the short run is, but in economic terms, it is the flexibility of the decision makers over production rather than the time span.

Arguably, one would state that short run is a period that involves fixing a certain quality so that quantities of other inputs vary while long run is time span that allows all input quantities to vary. This does not entail fixed time but it rather varies from one manufacture to another. For instance, if a company’s products are in high demand then it requires quick requests for more raw materials and more labour to satisfy the high demand.

The raw materials and labour in this case are the variable inputs since the employees can vary their input time to cover the high demands. The equipment used in the company may probably not vary but it would depend on time required to implement use of additional equipments in which case this is not a short-term project. (Thomas, Christopher and Maurice, 2008)

Difference between shot and long run production

In line with Thomas, Christopher and Maurice, (2008), it is possible to increase the production unit but it would require more time therefore given enough time, all inputs are variable. The short run production involves one or more important conditions, which do not vary while long run entails the situation where all inputs are variable.

Production is management of resources and the general environment. The next process after producing is distributing the goods for consumption. This process of producing, distributing and consuming goods and services defines Economics.

In production of economic goods and services, the natural resources are the source of raw materials and energy while the skills and labour comes from the human resources. Today production depends on the pure market economy where the government controls all the procedures involved unlike traditionally where resources for production were people who were self sufficient to manage them independently.

Phenomena of production and cost in short and long-term

The phenomenon of production and cost in short or long-term come about through the principal of supply and demand where the market equilibrium is the focal point. The aim of most producers is to increase production as a positive sign of development or for economical growth through which the simulation is growth of the population. Population growth causes increase in consumption of natural resources and per capita consumption.

The measures of economical growth such as Gross National Production (GNP), expectancy, per capita GNP, Gross Domestic Product (GDP) and literacy rate represent the total market value of the goods and services, which equally influence the short and long –term production phenomenon.

Ways of determining the cost of production

Producers should know their costs because this is important information for determining the contribution of the enterprise towards profitability and any future projection towards profitability and cash flows. This information is also important for comparison of efficiency. It helps them determine the level of profits and assists in long range planning and analyzing of the business future expansion plans. (Thomas, Christopher and Maurice, 2008)

Most producers will state that knowing the business cost of production is a good practice but it is not possible for most business people to know their production and cost in the long-term because the enterprises have diverse business units. Production involving different business units may call for allocation of certain costs in the units.

Some common misunderstanding that may arise during calculation of cost of production include determining the costs that should be included for instance, should one include a charge for personal labour, the interest charged on capital or depreciation allowance for the purchases of capital.

There are various ways of calculating cost of production for the various purposes of analyzing the entire enterprise. “The financial concept determines the viability of the enterprise in the short term” (Thomas, Christopher and Maurice, 2008) Financial profits are important for the feasibility and continuity of the enterprise.

The financial concept does not favour long-term viability because it does not include the opportunity cost of labour and equity capital or miscellaneous expenses. It translates that a number of expenses would fail to stand for main importance for an asset.

The economical concept applies in determining the long-term practicability of the business and in the analysis of the competition among enterprises due to limited resources. According to Thomas, Christopher and Maurice, (2008) the economical cost of production is usually higher than the financial cost of production because of interest charges over the invested capital and labour.

Analysis of short-term liquidity of a company uses a cash flow concept, which entails checking the generation and usage of cash. This approach does not analyze the profitability of a company but deals with the company’s short-term debts, principal payments, miscellaneous expenses such as income tax or social security funds and un-financed purchases of capital.

The determining point of some pricing mechanisms is the production cost. Some companies will use the cost and pricing method, which entails addition of an amount to the production cost as a way of determining an appropriate cost at the subsequent distribution level. Others will use the general cost method, which does not account for the competitive environment for the sales.

On the other hand, the “average cost pricing” entails identification of costs varying with the production level as well as the fixed production costs. Fixed costs may be for instance rent, assets such as equipments costs and basic overhead costs while varying costs may include labour or raw materials.

The cost structure therefore determines the average variable and fixed costs, which eventually give the total cost to base the prices in accordance with the expected levels of production. The cost-based pricing is short-term and has several distinct drawbacks such as lack of flexibility and having temporal objectives of the enterprise. It is therefore not often included in the company’s long-term strategic plan due to lack of good benefits provisions for future expenses. (Ajami, Cool and Goddard, 2006)

A unique distinction between the short-term and long-term incremental costs is that, long-term provides ample information for future development of the company and cost remains unchanged while with short-term incremental cost, the cost opportunities may be lost. (Drury, 2007)

Economists make standard assumptions because it is possible to vary inputs in the end while in the short run some inputs are presumably fixed.

According to Cooke, (1994), “Entrepreneurs view their workforce as the only variable input in the short-term.” In the long-term, there is grater opportunity of attaining or achieving multidimensional changes over the comparative quantities of aspects of producing goods and services.

This is an overview that functions of production are different in the short run as well as long run. Times play a significant influential role in the relationship of capital and labour thus the inference to the various levels of output.

Traders check to ensure the charge price remains fair and reasonable. The professional method of evaluating the supplier has cost in relation to buyer’s price remains a challenge in various industries.

The control of the cost is on the logic that the buyer focuses the cost associated with production before agreeing on a final selling price. The ultimate reason over cost/price analysis process is on the determination over fairness of the prices charged for both buyer and seller. The purchaser must understand the difference between cost and price, where price come about because of the cost and profit.

One arrives at the procurement functions on the basis that analysis of the price involves comparison between supplier and other external prices. According to Swamidass, (2000) cost analysis involves single elements that are not confidential such as labour, time, rates, overhead, raw materials, profits, administration and other general costs.

Conclusion

Understanding the difference between the types of costs helps in the discussion of production and cost analysis techniques both in the long-term and short-term.

The study of resource allocation probably fits perfectly over short-run situations as opposed to long run but companies’ decision over classification and allocation of resources especially in the competitive environments determines the allocation. On the other hand, allocation of resources is not the important aspect for long-run analysis because trying to analyze all situations through the allocation economics; it distorts and prevents understanding of the situation.

Arguably, the technological production is very important in provision of raw materials but the argument highly obscures the history and process of creating resource. It equally “constrains the study of production of technology in general” thus providing a barrier over future assessments of resources by the economists. (Blanchard, 2009)

References

Ajami, R.A., Cool, K. and Goddard, G.J. (2006) International business: theory and Practice. M.E. Sharpe.

Blanchard, Oliver (2009), Macroeconomics, Fifth Edition, Prentice Hall.

Cooke, A. (1994). The economics of leisure and sport. Routledge publishers

Drury, C. (2007) Management and Cost Accounting Cengage Learning EMEA,

Swamidass, P.M., (2000), Encyclopaedia of production and manufacturing management

Springer LINK e-book collection: Springer Publishers

Thomas, Christopher R. and Maurice, S.C. (2008), Managerial Economics (9th edition), International Edition, McGraw Hill

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