Difference between Short-Run and the Long-Run

Learn about the difference between Short-Run and the Long-Run.

In microeconomics we draw a distinction between the short run and the long run on the basis of fixity and / or variability of factors of production.

But the time horizons of macroeconomics are looked at in a different way.

In the short run prices are assumed to remain fixed (or sticky), as Keynes argued; in the long run prices are flexible (as has been postulated by the classical economists). And this has an important implication as far as the effectiveness of monetary and fiscal policies is concerned.

Normally monetary policy operates with a time lag, but the effect of fiscal policy is felt immediately. However, this prediction does not hold if the money market adjusts instantaneously but the market for goods and services takes time to adjust in response to any policy change.

In the short run most, if not all, prices and wages are sticky and do not fall even when the money supply is reduced. This is why monetary policy does not exert much influence on the economy in the short run. In the face of price stickiness output and employment adjust. In response to changes in money supply. This is why the classical dichotomy does not hold in the short run.