When demand for a firm\'s product decreases, the firm can take a number of steps

Question

When demand for a firm's product decreases, the firm can take a number of steps to adjust costs and quantities supplied to the market. Some are listed below. Which actions are short run and which are long run? Explain your reasoning.

a. Layoff 25% of the firm's existing employees.
b. Declare bankruptcy and sell all of the firm's plant and equipment.
c. Require management personnel to take a significant cut in pay.
d. Furlough employees for 3 days each month.
e. Move to a smaller production facility.

Explanation / Answer

a. This is probably long-term because of labor contracts. b. This could be short term or long term depending on the size of the drop in demand. If the drop in demand is large enough to push the market price below the average variable cost, then the firm should declare bankruptcy and liquidate assets immediately unless there is some reason to think that the drop in demand is only temporary. c. This could be short-term or long term depending on labor contracts. d. This sounds like a short-term remedy. e. This is definitely a long-term remedy because moving to a smaller production facility will require your lease to run out or you to obtain a buyer for the building if you own it.

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