In a microeconomic context, the long run is not defined as a specific length of time, but is instead defined as the time horizon over which there are no sunk fixed costs. More specifically, we can differentiate between the short run and the long run as follows:
The Short Run
- Fixed costs are already paid and are unrecoverable, i.e. "sunk costs"
- Firms can "shut down" and produce nothing but can't fully exit a market
- The number of firms in a market is fixed (because firms can't fully enter or exit)
- Firms will produce if the market price at least covers variable costs, since fixed costs have already been paid and, as such, don't enter the decision-making process
- Firm profits can be positive, negative or zero
The Long Run
- There are no sunk fixed costs- i.e. all production decisions such as plant size, method of production, etc. are still flexible
- Firms can fully enter and exit the market, so the number of firms in the market is not fixed
- Firms will enter a market if the market price is high enough to result in positive economic profits
- Firms will exit a market if the market price is low enough to result in negative economic profits
- If all firms have the same costs, firm profits will be zero in the long run in a compeittive market
