Q1 a) What are the long run and the short run concepts? Why is it important to differentiate between these two concepts?.
b) Drawing on the article "Safeway for Morrison's", explain why economies of scale are important in the supermarket industry.
A1) a) Long run and short run cost functions.
Short run- the short run is defined as the period of time over which some inputs called fixed inputs cannot be varied. The input that is fixed in the short run is usually an element of capital such as building For example you have a garment factory and you pay a fixed rent for the factory building. This is independent of how many garments are manufactured in that time. There is a time element in naming these costs as fixed. In the short run production can be changed only by using more or less of those factors which can be varied. In .
Long run- in the long run all inputs are variable because costs that are fixed in the short run can be changed in the long run. Therefore costs that are fixed within a period of time or in the short run could become variable in the long run for instance in the long run the building might be rented out or something or maybe a portion of it is rented. In other words fixed costs only exist in the short run.
Relation between long run and short run concepts.
In the long run, the firm can vary all its inputs. In the short run, some of these inputs are fixed. Since the firm is constrained in the short run, and not constrained in the long run, the long run cost TC(y)( total cost of producing y) of producing any given output y is no greater than the short run cost STC(y)( short run total cost) of producing that output: .
TC(y) (total cost) STC(y) (short run total cost) for all y. .
Assuming that in the short run exactly one of the firm's inputs is fixed. For concreteness, suppose that the firm uses two inputs, and the amount of input 2 is fixed at x. For many (but not all) production functions, there is some level of output, say y, such that the firm would choose to use x units of input 2 to produce y, even if it were free to choose any amount it wanted.
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