Explain the concepts of the short run and the long run.

Laws of Returns. Production broadly means, "transformation of inputs into output." Further output is function of inputs. More the inputs, more will be the quantity of output produced if technology remains the same. Change in quantity of output may be referred to as 'return'. Law of Returns explains the change in physical output as a result of change in inputs. It is studied under two situations, namely (i) short period (in which some factors are fixed and some are variable) and (ii) long period (in which all factors are variable).

(a) Short Period and Long Period.

Short period. A short period is the period of time in which a firm can change only variable factor (like labour, raw material) but not its fixed factors of production (like plant, machinery, building etc.) Therefore, in short period output can be increased only by increasing the quantity of variable factors like raw material, labour, power etc.

Long period. "A long period is a time period during which a firm can change all factors of production including machinery, building, organisation etc." It is period of time when all factors are variable i.e. supply can fully adjust itself to change in demand.

(b) Fixed Factors and Variable Factors

Fixed factors generally mean those factors of production which cannot be changed easily during short period, e.g., factory building, machines, plant, and services of management.

Variable factors, on the other hand, generally refer to those factors of production which can be varied or changed during short period, e.g., raw material, ordinary labour, power, fuel etc. Thus distinction between fixed and variable factors is valid only in short period as in the long period all factors become variable.

Two types of production function are generally discussed namely: (t) Short period production function, and (ii) Long period production function. Short term production function is explained in the form of law of variable proportion (also called Returns to a factor) whereas long run production function is discussed in the form of Returns to scale as shown below.