A short-run production function refers to that period of time, in which the installation of new plant and machinery to increase the production level is not possible. On the other hand, the Long-run production function is one in which the firm has got sufficient time to install new machinery or capital equipment, instead of increasing the labour units.
The production function can be described as the operational relationship between the inputs and outputs, in the sense that the maximum amount of finished goods that can be produced with the given factors of production, under a particular state of technical knowledge. There are two kinds of the production function, short run production function and long run production function.
Short Run Production Function
The short run production function is one in which at least is one factor of production is thought to be fixed in supply, i.e. it cannot be increased or decreased, and the rest of the factors are variable in nature.
In general, the firm’s capital inputs are assumed as fixed, and the production level can be changed by changing the quantity of other inputs such as labour, raw material, capital and so on. Therefore, it is quite difficult for the firm to change the capital equipment, to increase the output produced, among all factors of production.
In such circumstances, the law of variable proportion or laws of returns to variable input operates, which states the consequences when extra units of a variable input are combined with a fixed input. In short run, increasing returns are due to the indivisibility of factors and specialisation, whereas diminishing returns is due to the perfect elasticity of substitution of factors.
Long Run Production Function
Long run production function refers to that time period in which all the inputs of the firm are variable. It can operate at various activity levels because the firm can change and adjust all the factors of production and level of output produced according to the business environment. So, the firm has the flexibility of switching between two scales.
In such a condition, the law of returns to scale operates which discusses, in what way, the output varies with the change in production level, i.e. the relationship between the activity level and the quantities of output. The increasing returns to scale is due to the economies of scale and decreasing returns to scale is due to the diseconomies of scale.
SHORT RUN PRODUCTION FUNCTION
LONG RUN PRODUCTION FUNCTION
|Meaning||Short run production function alludes to the time period, in which at least one factor of production is fixed.||Long run production function connotes the time period, in which all the factors of production are variable.|
|Law||Law of variable proportion||Law of returns to scale|
|Scale of production||No change in scale of production.||Change in scale of production.|
|Factor-ratio||Changes||Does not change.|
|Entry and Exit||There are barriers to entry and the firms can shut down but cannot fully exit.||Firms are free to enter and exit.|
The difference between short run and long run production function can be drawn clearly as follows:
- The short run production function can be understood as the time period over which the firm is not able to change the quantities of all inputs. Conversely, long run production function indicates the time period, over which the firm can change the quantities of all the inputs.
- While in short run production function, the law of variable proportion operates, in the long-run production function, the law of returns to scale operates.
- The activity level does not change in the short run production function, whereas the firm can expand or reduce the activity levels in the long run production function.
- In short run production function the factor ratio changes because one input varies while the remaining are fixed in nature. As opposed, the factor proportion remains same in the long run production function, as all factor inputs vary in the same proportion.
- In short run, there are barriers to the entry of firms, as well as the firms can shut down but cannot exit. On the contrary, firms are free to enter and exit in the long run.
To sum up, the production function is nothing but a mathematical presentation of technological input-output relationship.
For any production function, short run simply means a shorter time period than the long run. So, for different processes, the definition of the long run and short run varies, and so one cannot indicate the two time periods in days, months or years. These can only be understood by looking whether all the inputs are variable or not.