IndianInstituteofSpaceScienceandTechnology

DepartmentofHumanities

HS211IntroductiontoEconomics

ClassRoomLecturePoints
(For2014admissions)

Dr.ShaijumonCS
ReaderinEconomics,
Dept.ofHumanities

Lecture1

of

WhatisEconomics?DefinitionsImportanceofEconomicsSchoolsofthought
TheEconomicProblemScarcityandChoiceResourceallocationthequestion
Whattoproduce,HowtoProduceandHowtoDistributeOutput

Manyoftheworldsmostpressingproblemsareeconomic.Forexampleslowdownof
economicgrowth,riseinoilprices,internationaltradeanditsissues,unemployment,
inflationetc.arezerounemploymentandzeroinflationreasonablelongtermgoals?
Whatisanacceptablelevelofunemployment?Whydopriceinsomecountriesrisemore
andothersless?Canacountrycontrolunemploymentandinflation?
Problemschangeoverdecades,yettherearealwaysproblems.Ofcourse,notallthe
worldsproblemsareprimarilyeconomic.Butnomatterhownoneconomicaparticular
problemmayseem,itwillalmostalwayshaveasignificanteconomicdimension.
Onewayofdefinethescopeofeconomicsistosaythatitisthesocialsciencethatdeals
withsucheconomicproblems.Anotherperhaps,thebetterknown,isAlfredMarshalls
Economicsisastudyofmankindintheordinarybusinessoflife
Wealth definition Adam smith : more emphasis on wealth his book titled an
enquiryintothenatureandcausesofthewealthofnationspopularlyknownaswealth
ofnationspublishedintheyear1776.Adamsmithisknownasthefatherofeconomics
WelfaredefinitionAlfredMarshall:hereemphasisshiftsfromwealthtoman.Man
occupiesaprimaryplaceandwealthonlyasecondaryone.Economicsisascienceof
materialwelfarehisbooktitledprinciplesofeconomicspublishedin1890.
ScarcitydefinitionLionelRobbins
ModerndefinitionJMKeynes
MostaccepteddefinitionisScarcitydefinitionEconomicsisthesciencewhichstudies
humanbehaviorasarelationshipbetweenendsandscarcemeanswhichhavealternative
uses The study of the way in which mankind organizes itself to tackle the basic
problemsofscarcityallsocietieshavemorewantsthanresources.Thereforeasystem
mustbedevisedtoallocatetheseresourcesbetweencompetingendsendsrefersto
wants human beings have wants which are unlimited in number if one want is
satisfied another crops up. Multiplicity of wants calls forth ceaseless effort for their
satisfactionifwantshadbeenlimited,theywouldhavebeenadequatelysatisfiedand
therewouldhavebeennoeconomicproblemallincentivetoeconomiceffortwould
have ceased also, since human wants are unlimited, one is compelled to choose
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betweenthemoreurgentandthelessurgentwants.Thatiswhyeconomicsisalsocalled
ascienceofchoice.
WhatisEconomics?
Economicsisthestudyofhowsocietiesusescarceresourcestoproducevaluablegoodsand
servicesanddistributethemamongdifferentindividuals.
Becauseresourcesarescarce,allsocietiesfacetheproblemofdecidingwhattoproduce,
howtoproduceandforwhomtoproduce?Societiesdifferinwhomakesthechoicesand
howtheyaremade,buttheneedtochooseiscommontoall.Justasscarcityimpliesthe
needforchoice,sochoiceimpliestheexistenceofcost(opportunitycost)
Mostproblemsstudiedbyeconomistscanbegroupedunderfourmainheadings
1. WhatisproducedandHow?
The allocation of scarce resources among alternative uses, called resource
allocation, determines the quantities of various goods that are produced.
Choosing to produce a particular combination of goods means choosing a
particularallocationofresourcesamongtheindustriesorregionsproducingthe
goods. Further,becauseresourcesarescarce,itisdesirablethattheybeused
efficiently.Henceitmatterswhichoftheavailablemethodsofproductionisused
toproduceeachofthegoodsthatistobeproduced.
2. Whatisconsumedandbywhom?
3. Howmuchunemploymentandinflationexist?
4. Isproductivecapacitygrowing?
Wecanderivethefollowingfundamentalproblems
1. Whattoproduce?
2. Howtoproduce?
3. Forwhomtoproduce?
4. Aretheresourceseconomicallyused?
5. ProblemsofFullemployment.
6. ProblemsofGrowth
ImportanceofEconomics
1. Howtomanagemacroeconomy?
2. Overcomingmarketfailures
3. EfficiencyOptimumutilizationofresources
4. Individualeconomics
Asocietysresourcesconsistofnaturalgiftssuchasland,forests,minerals,human
resources, machinery, buildings etc. Economists call such resources factors of
production,becausetheyareusedtoproducethosethingsthatpeopledesire.Thethings
producedarecalledcommodities.Commoditiesmaybedividedintogoodsandservices.
Goodsaretangibleandservicesareintangible.Theactofmakinggoodsandservicesis
called production, and the act of using them to satisfy wants is called consumption.
Goodsarevaluedfortheservicestheyprovide.
Adecisiontohavemoreofonethingrequiresadecisiontohavelessofsomething
else.
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All economiesfacescarcity, allmust decidehow to allocatescarceresourcesand

distributegoodsandservices;allmayfaceproblemsofinflation,unemployment,and
unsatisfactoryratesofgrowth.
Ifallgoodswouldbefree,likesandinthedesertorseawateratthebeach.Allprices
wouldbezero,andmarketswouldbeunnecessary.Indeed,economicswouldnolonger
beausefulsubject.Butnosocietyhasreachedautopiaoflimitlesspossibilities.Oursisa
worldofscarcity,fullofeconomicgoods.
Economicefficiency requiresthataneconomyproducethehighestcombinationof
quantityandqualityofgoodsandservicesgivenitstechnologyandscarceresources.An
economyisproducingefficientlywhennoindividualseconomicwelfarecanbeimproved
unlesssomeoneelseismadeworseoff.(Samuelson,p.5)
Theessenceofeconomicsistoacknowledgetherealityofscarcityandthenfigureout
howtoorganizesocietyinawaywhichproducesthemostefficientuseofresources.
EconomicSystem
AnEconomicsystemisthesystemofproduction,distributionandconsumptionof
goodsandservicesofaneconomy.Itisthesetofprinciplesandtechniquesbywhich
problems of economics are addressed, such as the economic problem of scarcity
throughallocationoffiniteproductiveresources.Theeconomicsystemiscomposed
ofpeopleandinstitutions,includingtheirrelationshipstoproductiveresources.
Therearethreebasiceconomicsystems
1.Capitalism
2.Socialism
3.MixedEconomy
Capitalism referstoaneconomicandsocialsysteminwhichthemeansofproduction
(capital)areprivatelycontrolled;laborandgoodsaretradedinfreemarketandprofits
are regularly reinvested in new ventures. Pure capitalism has always only existed in
theories.Capitalismhasbeendominantinwesternworldsincetheendoffeudalism.The
desireforprofitisthesoleconsideration.Themajorfeaturesare
RightofPrivateproperty
Freedomofenterprise
Freedomofchoicebytheconsumers(consumersovereignty)
Profitmotive
Classconflict(Havesandhavenots)economicinequalities
Uncoordinatednature
Vitalroleforentrepreneur
Controlwithriskshewhoriskshismoneymustalsocontrolthebusiness
Perfectcompetition
Importanceofpricesystem
Thedemeritsofcapitalismare
Wastefulcompetition
Humanwelfareignored
Economicinstabilityandunemployment
Propertyrightstakeprecedenceoverhumanrights
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Classconflict
Socialinjusticeandeconomicinequality
Misallocationofresources
Emergenceofmonopoliesandconcentrationofeconomicpower
Malpractices

Socialism is an economic organization of society in which the material means of

production are owned by the whole community and operated by the organs
representative of, and responsible to, the community according to general plan, all
membersofthecommunitybeingentitledtobenefitsfromtheresultsofsuchsocialized
plannedproductiononthebasisofequalrights.Themajorfeaturesare
Socialownershipofmeansofproduction
Noprivateenterprise
Economicequality
Equalityofopportunity
Economicplanning
Socialwelfareandsocialsecurity
Classlesssociety
Meritsofsocialism
Socialjustice
Betterallocationofresources
Improvingproductiveefficiency
Socialsecurityandwelfare
Economicstability
Demerits
Bureaucracyandredtapism
Notsuccessfulinbusiness
Insufficientresources
Misallocationofresources
Lossofconsumersovereignty
Lackofincentives
Lossofeconomicfreedom
Concentrationofpowerinthestate
Lossofpersonalliberty
MixedEconomy
Mixed economy is an economic system which is neither pure capitalism nor pure
socialismbutamixtureofthetwo.Inthesystemwefindthecharacteristicsofboth
capitalismandsocialism.
Mainfeatures
Coexistenceofthepublicandprivatesectors
Roleofpricesystemandgovernmentdirectives
Govt.regulationandcontrolandprivatesector
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Consumerssovereigntyprotected
Govt.protectionoflabor
Reductionofeconomicinequalities
Controlofmonopoly.

Marketeconomy isaneconomybasedonthedivisionoflaborinwhichthepricesof
goodsandservicesaredeterminedinafreepricesystemsetbysupplyanddemand.This
isoftencontrastedwithaplannedeconomy,inwhichacentralgovernmentdetermines
the price of goods and services using a fixed price system. Market economies are
contrastedwithmixedeconomywherethepricesystemisnotentirelyfreebutunder
somegovernmentcontrolthatisnotextensiveenoughtoconstituteaplannedeconomy.
ThirdWorldEconomies
TheeconomicallyunderdevelopedcountriesofAsia,Africa,Oceania,andLatin
America,consideredasanentitywithcommoncharacteristics,suchaspoverty,
highbirthrates,andeconomicdependenceontheadvancedcountries.TheFrench
demographer Alfred Sauvy coined the expression ("tiers monde" in French) in
1952 byanalogy with the"third estate," thecommoners of Francebefore and
duringtheFrenchRevolutionasopposedtopriestsandnobles,comprisingthe
firstandsecondestatesrespectively.
IsEconomicsaScience?
Astatementisscientificonlyifitisopentothelogicalpossibilityofbeingfoundfalse.
This definition means that we evaluate scientific statements by testing them, by
comparingthemtotheworldaboutus.(KarlPopper)
MosteconomistsseetheirdisciplineasscientificinPopper'ssenseoftheword.Economic
theorymakesstatementsabouthowfactsfittogether,andthereareconstantlynewsets
offactsarisingthatallowonetotestthetheorytoseewhetherthefactsareastheory
predicts. However, this process is more difficult for economists than it is for most
physicalscientists.
MosteconomistsseetheirdisciplineasscientificinPopper'ssenseoftheword.Economic
theorymakesstatementsabouthowfactsfittogether,andthereareconstantlynewsets
offactsarisingthatallowonetotestthetheorytoseewhetherthefactsareastheory
predicts. However, this process is more difficult for economists than it is for most
physicalscientists.
Unlikephysicalscientists,economistscanalmostneverusecontrolledexperiments
togatherfactswithwhichtotesttheories.Rathertheymustusewhateverfacts
theworldgivesthemandrelyonstatisticalprocedurestodrawconclusions
There is a minority of economists, however, who do not see economics as
scientificinPopper'ssense.AgroupofeconomistscalledtheAustrianschool,for
example,hasarguedthateconomicsstartswithassumptionsandthateconomic
theoryisthelogicallydeducedresultsofthoseassumptions.Ifthetheorydoesnot
fitthefacts,onecannotconcludethatthetheoryiswrong,butonlythatitis
inappropriatetoapplythetheoryinthatparticularsituationbecausetheinitial
conditionsdonotagreewiththeassumptionsofthetheory.
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Economists use the scientific approach to understand economic life. This involves
observingeconomicaffairsanddrawinguponstatisticsandthehistoricalrecord.Often,
economicsreliesuponanalysesandtheories.Theoreticalapproachesalloweconomiststo
make broad generalizations. In addition, economists have developed a specialized
technique known as econometrics, which applies the tools of statistics to economic
problems.
Thefollowingaresomeofthecommonfallaciesencounteredineconomicreasoning:
1. Theposthocfallacy:itinvolvestheinferenceofcausality.Theposthocfallacy
occurswhenweassumethat,becauseoneeventoccurredbeforeanotherevent,
thefirsteventcausedthesecondevent.Example:GreatDepressionof1930s.
2. Failure to hold other things constant: a second pitfall is failure to hold other
thingsconstantwhenthinkingaboutanissue.
3. Thefallacyofcomposition:whenyouassumethatwhatistrueforthepartisalso
trueforthewhole,youarecommittingthefallacyofcomposition.
PositiveandNormativeEconomics
Positive economics describes the facts of an economy, while normative
economics involves value judgments. Normative economics involves ethical
preceptsandnormsoffairness.Apositivestatementisastatementaboutwhatis
andthatcontainsnoindicationofapprovalordisapproval.Noticethatapositive
statementcanbewrong."Themoonismadeofgreencheese"isincorrect,butitis
a positive statement because it is a statement about what exists. A normative
statement expresses a judgment about whether a situation is desirable or
undesirable."Theworldwouldbeabetterplaceifthemoonweremadeofgreen
cheese" is a normative statement because it expresses a judgment about what
ought to be. Economists have found the positivenormative distinction useful
because it helps people with very different views about what is desirable to
communicatewitheachother
Economists can confine themselves to positive statements, but few are
willingtodosobecausesuchconfinementlimitswhattheycansayaboutissuesof
governmentpolicy.Bothpositiveandnormativestatementsmustbecombinedto
make a policy statement. One must make a judgment about what goals are
desirable(thenormativepart),anddecideonawayofattainingthosegoals(the
positivepart).
MicroandMacroEconomics
Economicsisdividedintotwomajorsubfieldsmicroeconomicsandmacroeconomics.
AdamSmithisconsideredasthefounderofMicroeconomics.Thisbranchofeconomics
concernedthebehaviourofindividualentitiessuchasmarkets,firms,andhouseholds.
Macroeconomicsstudiestheoverallperformanceoftheeconomy.JohnMaynardKeynes
isconsideredasthefounderofMacroEconomics.HisbooknamedGeneralTheoryof
Employment, Interest and Moneypublished in 1936 hasrevolutionised the world of
macroeconomics.ThroughhisnewtheoryKeynesdevelopedananalysisofwhatcauses
businesscycles,withalternatingspellsofhighemploymentandhighinflation.
DemandandSupply
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Howdoweexplainthechangesinpricesorchangesinsupplyordemandetc.of a
commodity? What makes the demand/supply of a commodity? What determines the
pricesinthemarket?
Haveyoueverthoughtaboutthosethings?
I economics we have a very powerful tool for explaining such changes in economic
environment.Itiscalledthetheoryofsupplyanddemand.
Demand:
Demandisadesirebackedbyabilityandwillingnesstopayforacommodity.
Thedemandforanythingatagivenpriceistheamountofitwhichwillbebought
per unit of time at that price. The quantity of a good or service which an
individualorgroupdesiresattherulingprice.
Demandschedule
Thereexistsadefiniterelationshipbetweenthemarketpriceofagoodandthe
quantity demanded of that good, other things held constant. The relationship
between the quantity and price bought is called the demand schedule, or the
demandcurve.Thedemandforindividualconsumeriscalledindividualdemand.
Thetotalamountofacommoditythatallhouseholdswithtopurchaseiscalled
thequantitydemandedofthatcommodity.
(addtable)
Demandcurve
Thegraphicalrepresentationofthedemandscheduleiscalledthedemandcurve.

D
P
P1
qq1D
Generallythedemandcurveslopesdownwardfromlefttoright.Itrepresentsthe
relation between quantity demanded and price, other things being equal.
(explanationwithexample)
The law of demand states that demand varies inversely with price, not necessarily
proportionately.Whenthepriceofacommodityisraised(andotherthingsareheld
constant), buyers tend to buy less of the commodity. Similarly, when the price is
lowered,otherthingsbeingconstant,quantitydemandedincreases.
Whydoesthedemandcurveslopesdownward?
Therearetworeasonsforthis.Thesubstitutioneffectandincomeeffect.
Substitution effect which occurs because a good becomes relatively more
expensivewhenitspricerises.WhenthepriceofgoodArises,wewillgenerally
substitutegoodsB,CorDforit(providediftheyareclosesubstitutes).exampleof
Teaandcoffee.
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Incomeeffectahigherpricegenerallyalsoreducesquantitydemandedthroughthe
incomeeffect.Whenpricegoesup,wefindourselvessomewhatpoorerthanwewere
before.Ifgasolinepricesincreases,wehaveineffectless realincome.Sowewill
naturallyreduceourconsumption.
Cconsumersbuymoreofacommoditywhenitspriceislowerisbecauseyoucan
increaseyourtotal utility ortheamountof''satisfaction''youcangainfromyour
income.Ifyouhaveafixedincomeandyouliketomatoes,ifthepriceoftomatoes
falls,thenyoucanbuymoreofthem.
Themarketdemandcurveisfoundbyaddingtogetherthequantitiesdemandedby
allindividualsateachprice.
Factorsbehinddemandcurve:
1. Theaverageincomeofconsumers
2. Thesizeofmarket
3. Thepricesandavailabilityofrelatedgoods
4. Tastesandpreferences
5. Specialinfluences
Typesofgoods
1. Normalgoods
2. SubstitutegoodsAgoodorservicewhichcanbeusedinsteadofanother.Ifthe
priceofsubstitutegoodsofXincreases,thedemandcurveofXwillshiftupward
andviceversa.
3. Complementarygoodsarelationbetweentwogoodsorservicesinwhicharise
in the price of one decreases demand for the other. A fall in price of a
complementarygoodofXwillie.Y,shiftsthedemandcurveofXtotheright.
MoreXwillbepurchasedbecauseofthecheappriceofY.
4. Giffen goods A good whose demand tends to fall as its price falls, thus
apparentlycontradictingthelawofdemand.SonamedafterSirRobertGiffen
(18371910)whoobservedthepoorbuyingmoreloafsofbreadasitspricerose.
5. Inferiorgoodsasotherthingsremainsthesame(ceterisparibus),whenincome
increases,thequantitydemandedforthegoodswillfall.Thosegoodsareknown
asInferiorgoods.
Shiftsindemandorincrease/decreaseindemand.
Ademandcurveisdrawnontheassumptionthateverythingexceptthecommoditys
ownpriceisheldconstant.Achangeinanyofthevariablespreviouslyheldconstant
willshiftthedemandcurvetoanewposition.(Factorslikechangeinpreferences,
income,expectationaboutfutureriseinpriceetc)

Explanationwithexample
One of the most important points that we must understand in economics is the
differencebetween shiftsindemand (changeindemand)curveand movements
along a curve. Shifts in demand occurs because factors other than price. A
movementalongthedemandcurveisbecauseofthechangesinpriceonly.Please
dontconfusebetweenchangeindemandandchangeinquantitydemanded.Change
in demand is shifts in demand and the change in quantity demanded is the
movementalongthedemandcurve.
Supply
Theamountofacommoditythatfirmswishtoselliscalledthequantitysupplied
ofthatcommodity.
Supplyschedule
Thesupplyscheduleforacommodityshowstherelationshipbetweenitsmarket
priceandtheamountofthatcommoditythatproducersarewillingtoproduce
and sell, other things held constant. (Add table). Supply schedule shows the
quantities that producers would wish to sell at alternative prices of the
commodity.
Supplycurve
Supplycurveisthegraphicalrepresentationofthesupplyschedule.Itrepresents
therelationbetweenquantitysuppliedandprice,otherthingsbeingequal.

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Explanationwithexample
Lawofsupply
Thelawofsupplystatesthatwhenpriceincreasethequantitysuppliedalsowill
increase.Thereisadirectrelationshipbetweenthepriceandquantitysupplied(other
thingsremainsthesame).Therelationshipisnotbetweenthequantitysuppliedand
theprice.
Factorsaffectingsupply
1. Stateoftechnology
2. Pricesofinputs(costofproduction)
3. Pricesofrelatedgoods
4. Governmentpolicy
5. Specialinfluences
Shiftsinsupply
A shift in supply curve means that at each price a different quantity will be
suppliedthanpreviously.
Ss1
P

Ss1
OQq1
Explanationwithexample
Same as in demand analysis here also we should not confuse between, shifts in
supplyandmovementalongthesupplycurve.Alsochangeinsupplyandthechange
inquantitysupplied.
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Equilibrium
Equilibrium occurs where the quantity demanded equals quantity supplied
wherethereisneitherexcessdemandnorexcesssupply.Thepriceatwhichthequantity
demandedequalsthequantitysuppliediscalledtheequilibriumprice.
We know that the amounts that are willingly bought and sold at each price.
Consumersmaydemanddifferentamountsofcommoditiesasafunctionofthesegoods
prices.Similarlyproducerswillinglysupplydifferentamountsofgoodsdependingon
theirprices.Buthowcanweputbothsidesofthemarkettogether?
Theansweristhatsupplyanddemandinteracttoproduceanequilibriumprice
andquantity,oramarketequilibrium.Themarketequilibriumcomesatthatpriceand
quantitywheretheforcesofsupplyanddemandareinbalance.Attheequilibriumrice,
theamountthatbuyerswanttobuyisjustequaltotheamountthatsellerswanttosell.
Thereasonwecallthisanequilibriumisthat,whentheforcesofsupplyanddemandare
inbalance,thereisnoreasonforpricetoriseorfall,aslongasotherthingsremain
unchanged.

Explanationwithexample.

Production
Theactofmakinggoodsandservicesiscalledproduction.Itisacreationof
valueValueadditionchanginginputsintooutputsetc.
Inputs are commodities or services that are used to produce goods and services.
Outputs are the various useful goods or services that result from the production
processandareeitherconsumedoremployedinfurtherproduction.Anothertermof
inputsisfactorsofproduction.
Factorsof productioncanbegrouped into fournamelyland,labour,capital and
organization.Theywillgetrent,wage,interestandprofitrespectivelyasrewards
fromtheeconomicactivities.
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ProductionfunctionProductionfunctionmaybedefinedasthefunctionalrelationship
betweenphysicalinputs(i.e.factorsofproduction)andphysicaloutputs(i.e.thequantity
ofgoodsproduced).
Inageneralmathematicalform,aproductionfunctioncanbeexpressedas:
Q=f(X1,X2,X3,...,Xn)where:Q=quantityofoutputX1,X2,X3,...,Xn=factorinputs
ProductionpossibilityCurve
We learn early in life that we cant have everything. The consumption
opportunitiesofcountriesarelimitedbytheresourcesandthetechnologiesavailable
tothem.ExampleofGunandButter.Letusdramatizethechoicebyconsideringan
economy which produces only two economic goods, guns and butter. The guns
represent military spending, and the butter stands for civilian spending. Extreme
possibilitiesthefollowingdiagramshowsbutter(productB)alongthehorizontal
axisandGuns(productA)alongtheverticalaxis.Thecurveassumesthatthestateof
technologyandtheavailabilityofresourcesareconstant.ThepointXrepresentsthe
underutilizationofresourcesandthepointYistheunattainablecombination.

Theproductionpossibilityfrontiershowsthemaximumquantityofgoodsthatcanbe
efficientlyproducedbyaneconomy,givenitstechnologicalknowledgeandthequantity
ofavailableinputs.
MRTorMRPT(Marginalrateofproducttransformation)istherateatwhichone
productistransformedintoanother.ForexampleMRPTbetweengoodAandgoodB
istheamountofBwhichhastobesacrificedfortheproductionofA.
TheMRPTatanypointontheproductionpossibilitycurveisgivenbytheslopeofthe
curveatthatpoint.
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Productiveefficiencyoccurswhenaneconomyproducemoreofonegoodwithout
producing less of other good; this implies the economy is on its production
possibilityfrontier.
The production possibility curve will shift upward when the state of technology
changes.Whentheeconomygrowsthecurvewillshiftupward.Alleconomiesare
strivingfortoshifttheirrespectivePPFtotherightwarddirection.

p
a
productA

bqproductB

TheAmericanPoetCarlSandburgwroteTimeisthecoinofyourlife.Itistheonlycoin
youhaveandonlyyoucandeterminehowitwillbespent.Becarefullestyouletother
peoplespenditforyou
By sacrificing current consumption and producing more capital goods, a nations
economycangrowmorerapidly,makingpossiblemorebothgoods(consumptionand
investment)inthefuture.
Opportunitycost:therewillbeforgoneopportunity.Thenextbestgoodthatisforgone
representstheopportunitycostofadecision.Inaworldofscarcity,choosingonething
meansgivingupsomethingelse.
Totalproductisthetotalamountofoutputproducedbyafirm.
Averageproductisequaltototaloutputdividedbynumberofunitsofinputs.
Marginalproductistheextraoutputproducedbyaddingoneadditionalunitofinp

Shortrunandlongrunshortrunisaperiodinwhichfirmscanadjustproductionby
changingvariablefactorssuchasmaterialsandlaborbutcannotchangefixedfactors
suchascapital.Thelongrunisaperiodsufficientlylongthatallfactorsincludingcapital
canbeadjusted.Inotherwords,theshortrunistheperiodoftimeinwhichonlysome
inputs,thevariableinputs,canbeadjusted.Intheshortrun,fixedfactorscannotbefully
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modifiedoradjusted.Thelongrunisaperiodinwhichallfactorsemployedbythefirm
canbechanged.
Variablefactoristhefactorwhichvarieswithoutput.Fixedfactorsarethosefactors
whichremainsfixedwhentheoutputvariesintheshortrun.Inthelongrunallfactors
willbecomevariablefactor.

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