What is the long run in the economy?

What is the long run in the economy?

The long-run is a time period in which all factors of production and costs change, in which companies can control all costs, while in the short run companies affect prices only by adjusting levels of production. In addition, monopoly is Possible in the short term, while companies face competition in the long term.


Achieving short-term economic equilibrium leads to long-term economic paradigms in which supply and demand interact with price levels with greater flexibility.


Quick main ideas

The long-run is a time period in which all factors of production and costs are variable.

When the average cost falls in the long run, this means increased production. When it rises, the company faces an irregular size.

Companies are looking for production technology that allows them to reach the required level of production at the lowest cost.

What is the long run of the economy? Factors of production and costs Adjusting production levels Long-term economic models Interacting supply and demand with price levels


How the long run works

The manufacturer or producer is long-term flexible in production decisions, as companies can increase or decrease production capacity, start or end a new activity based on profit expectations, and companies that rely on long-term studies realize that they cannot change production levels to strike a balance between Supply and demand.

 In macroeconomics, the long run is the period in which the general level of price, contract wage rates, and economic expectations are fully adapted to the economic situation, unlike the short term in which these variables are not fully controlled.

 As mentioned above, long-term production and costs factors are variable, and companies adjust production levels based on expected economic profits, for example, increasing (or decreasing) production volume according to profits (or losses), which may require building a new plant or adding a production line.


On the other hand, all factors of production, except for the workforce, are fixed in the short term.


A long-term example

When a company adheres to a one-year lease agreement and is not bound by the lease agreement after the end of the year, any period longer than a year is an example of a long-term, in which the size of the factory, workforce, or production operations can be changed to meet the needs of the company or the leasing agency.


Special considerations

In the long run, the company is searching for a technology that allows it to reach the required level of production at the lowest cost and is at risk of losing market share if it cannot produce and sell at the lowest possible cost, and the competitor able to do so acquires this share.


Economies of the scale indicate the economic situation in which production increases and unit costs decrease, and this advantage is achieved by achieving an increase in production, and when the advantage of lower-cost translates into improving production efficiency, it gives the company a competitive advantage in its industrial operations, which in turn translates into a decrease in costs and increase in profits.


The long-run in the economy is related to the long-run average cost (LRAC) index, and by this, the average cost of production can be calculated when all factors of production are variable. Using the LRAC curve, companies reduce the cost of production per unit in the long term to the lowest possible level, and as long as this curve is declining, this means exploiting internal economies of scale.


When the average cost falls in the long run, this means increasing production and achieving economies of scale. As for its rise, the company faces diseconomies of scale, and if it remains constant, this means the stability of abundance in size.


The long-term average cost curve consists of a number of SRAC short-term curves, each of which represents a fixed cost, so the LRAC curve represents the lowest average cost for any level of production.


The economic deficit: What does it mean, how does it happen, and what are its risks?

Deficit economic deficit is the amount of the shortage of a resource below the required level, especially money. The deficit occurs when expenditures exceed revenues, imports increase over exports, or debts increase over assets, and deficits are synonymous with deficiency or loss, and opposite to the surplus. 

In the event of a deficit, the total of the negative amounts becomes greater than the total positive amounts. In other words, the outward cash flow exceeds the inward cash flow. A deficit occurs when a government, company, or individual spends more money than their income in a specified period of time, usually one year.

Understand the economic deficit

The deficit leads to high debt, whether the debtor is an individual or a company or an economy, so many analysts believe that it is not possible to tolerate the deficit for a long period of time.

On the other hand, Keynesian economist John Maynard Keynes assumes that deficits stimulate the economy by allowing governments to buy goods and services, thereby helping countries out of financial crises. Supporters of the trade deficit believe that it represents a direct result of global competition, that is, this type of deficit is caused by consumers buying foreign goods, which is a good thing whatever the reason behind it.

While critics of this idea believe that the trade deficit creates jobs in foreign countries rather than providing them to the local population, it is thus detrimental to the economy. And many critics argue that governments should avoid fiscal deficits because the cost of paying the debt will come at the expense of spending on useful things.


The economic deficit: What does it mean, how does it happen, and what are its risks? - The amount of shortage in a resource below the required level - revenue deficit - structural deficit


Terms related to disability

In addition to trade deficits and budget deficits, there are other types of deficits related to economic terms.


 Current account deficit: It occurs when a country imports more goods and services than it exports.

 Periodic deficit: It occurs when the performance of the economy is weakened by the stagnation of the business cycle.


  •  Deficit financing: This term refers to the methods the government uses to finance the budget deficit, and the main solutions available for this are issuing bonds or printing more cash.

  •  Deficit spending: It occurs when government spending exceeds the revenue it collected during a financial period, causing its debt to rise.

  •  Financial deficit: It occurs when the total government expenditures exceed the revenues that they have earned, except for borrowing.

  •  Income deficit: A measure that the United States Census Bureau uses to determine the amount that represents the income of an American family above the poverty line.

  •  Primary deficit: This is the fiscal deficit for the current year minus interest on previous loans.

  •  Revenue deficit: It is specific to the government only, and represents the decrease in total revenue compared to total expenditures.

  •  Structural deficit: is the deficit that occurs, even though the economy is operating at full capacity.

  •  Trade deficit: It is a measure of international trade, in which a country's imports exceed its exports.

  •  Double (twin) deficit: It is when the economy suffers a fiscal deficit and a current account deficit together.

Deliberate incapacity

Sometimes companies resort to creating a budget deficit in order to increase the chances of making profits in the future, such as companies retaining employees in the months of slow growth, to ensure that there is enough manpower in peak times.


Some governments resort to creating deficits in order to finance public projects and sustain some programs for their citizens.


Governments may create a deliberate deficit during crises, by reducing sources of revenue such as taxes, and by maintaining or raising the level of infrastructure spending, thereby providing more employment and income. The explanation for this is that these measures will raise the purchasing power of citizens, which stimulates the growth of the economy.




The risks of intentional disability

It may cause a deficit if it is significant that the ownership of individuals or shareholders is completely abolished. For governments, the negative effects include low economic growth rates (i.e. budget deficit) and a devaluation of the local currency (trade deficit).


There are several examples of intentional deficiency caused by several governments in the twentieth and twenty-first centuries. These experiences complicated the neoclassical analysis that competition leads to the efficient allocation of resources, striking a balance between supply and demand in the market. Because of the Great Recession, many supporters of the neoclassical school thought that government budgets were in danger of collapsing as a result of the persistent spending deficit.


Examples of helplessness from reality

The deficit of the federal (federal) budget for the United States of America increased in the first quarter of the fiscal year 2019 and will exceed one trillion dollars in 2020. This increase means that the United States is spending much more money than it earns from revenue, and this is because President Trump continues a policy of reducing returns Corporate taxes, increased defense spending.


The growing deficit is not a new problem in the United States, but the deficit has not reached this point in times of improving the economy. The US economy is currently in a stage of growth, unemployment is low, confidence in the economy is strong, and in conditions such as these, deficits are not expected, rather budget deficits or surpluses are expected, as occurred from 1998 to 2001.


Historically, the United States budgets have experienced significant deficits at times, and have achieved balance or surpluses at other times. The causes of disability vary, and they are always the subject of ongoing debate and debate. In our world-oriented economy, disability has become an issue that attracts different opinions.

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