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Explain the difference between the short run and the long run as it relates to the firm's production function
Explain the difference between the short run and the long run as it relates to the firm's production function. Why is this distinction important to a firm's manager?
Expert Solution
Difference between short run and long run production function is as follows:
| Short run production function | Long run production function |
| In short run, business organization cannot change the input quantities. | In long run, business organization can change its input quantities. |
| Law of variable proportion operates in short run production function | Law of returns to scale operates in long run production function. |
| Business organization cannot expand its activities in short run. | Business organization can change and expand its production activities in long run. |
This distinction is important to a manager because a manager must know when he can change the factors of production or when he can adopt changes and expand its business activities. By understanding the difference, a manager is able to identify the phase in which he can invest more money in the organization. For example, in the short run, changes in capital assets of the organization are not possible. Therefore, a manager must understand the difference in the long run and short-run production function.
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