Economists describe short-run decisions as “constrained” decisions, wh

Economists describe short-run decisions as “constrained” decisions, while long-run decisions are described as “planning” decisions. Referring to a firm’s short-run average cost function and long-run average cost function, explain this

What will be an ideal response?

ANSWER

In the short run, at least one of the inputs in the firm’s production function is fixed in amount. As such, the manager’s decision-making process is constrained by the available amount of the fixed input. In contrast, in the long run, all of the inputs in the production function can be varied. In this case, the manager can decide not only how much of each variable input to employ, but how much of the inputs that are fixed in the short-run should be employed as well, i.e., the manager can plan for future production needs.