Why is the long run often referred to as the planning horizo

Why is the long run often referred to as the planning horizon, while the short run is called the operational period What is the relationship between the two concepts Under what condition would the firm build a plant that does not minimize the cost of producing a specific level of output in the long run

Solution

6. (a). Why is the long run often referred to as the planning horizon, while the short run is called the operational period?

Planning horizon is often referred to as long-run average cost curve. Because it provides information that a firm can use to plan a factory construction and expansion in the long run. The curve is depicted as U-shape because of the economies of scale for small quantities and diseconomies of scale for large output. It is formed by envelopes of several short-run average total cost curves.

A firm has to decide the quantity of variable inputs it needs to produce a given output. When the business expects low business lesser number of goods are produced, and in peak hours more number of units are produced. This is the experience of the company in the short-run. This operational experience is used to plan things in the long run. These day-to-day decisions about the short-run production will help to expand business in the future, and provides a window into the future to make plans and take prudent decisions.

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