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Understanding Long-Run Production Decisions in Economics

Understanding Long-Run Production Decisions in Economics
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  • 0:02 What is Long-Run Production?
  • 1:32 Importance of Innovation
  • 2:30 Examples of Long-Run…
  • 5:10 Lesson Summary
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Lesson Transcript
Instructor: Kevin Newton

Kevin has edited encyclopedias, taught middle and high school history, and has a master's degree in Islamic law.

Companies cannot afford to simply fulfill their contracts and hope for them to be repeated. Instead, they always have to keep an eye on the long run, or the economic period just after all current contracts have been fulfilled.

What Is Long-Run Production?

You may not think about it, but just like you and me, companies dream about the future. They have to! After all, if the goal of a company is to make money indefinitely, they have to have a plan for when the current contracts end. These current contracts, known as the short-run, are vital from the perspective of how to stay in business. However, being able to plan beyond that is important as well. After all, how many businesses do you know that could really hope to stay competitive if they had a well-known expiration date?

As such, long-run planning, or planning for the future, is vital to a company's success. To go along with this, producers have to be aware of the costs of such long-run production. Long-run production planning is often referred to as the research and development stage. It concerns itself with business planning beyond current contracts.

Now, something that may confuse many people at first glance is how long-run costs are treated with respect to production. You'll notice that long-run production concerns itself only with variable costs. The reason for this is fairly straightforward - these costs can change. Sure, you may need to build a factory in the future, but you really don't have any idea how much that factory could cost. You could find a way of making existing production more efficient, or costs may increase. As such, economists consider all costs as variable in the long run.

Importance of Innovation

That idea of innovation is, in fact, vital to companies looking at long-run decisions. Sure, most businesses don't have to completely reinvent themselves with every new innovation, but a surprising number have to undergo some level of change in order to just be able to survive. A generation ago, for example, music was sold on CDs and cassette tapes. Now, one of the largest music stores is run by a company that primarily produces computers, phones, and tablets. Other sectors have undergone considerable innovations, as well.

Innovation does not always have to take the role of a new technology or method, but instead should always focus on a way of remaining profitable in the future. It is vital to remember that without an eye to the future, companies have an expiration date. Someone constantly has to be thinking about how to sell something after current contracts have ended. Let's take a look at some companies that were able to do just that, as well as one that failed to look to the future.

Examples of Long-Run Production

A number of companies have, through an eye towards long-run production, managed to remain at the forefront of business, even if their products have changed. In fact, some have managed to do so while selling the same products, but through innovations in advertisement, as well as by keeping an eye on long-run production. One company that was able to do this with considerable success is Kikkoman, a large soy sauce producer based in Japan. The families that founded Kikkoman have been making soy sauce since the 17th century and only became the company we know today due to the innovation of agreeing to work together.

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