THE DEMAND FOR PRODUCTION FACTORS IN THE SHORT AND THE LONG-RUN

This paper deals with the theory of production functions, or more specifically the demand for production factors. In the paper the distinction between the short and the long run is discussed, and it is shown that it is very simple to form short-run factor demands from long-run factor demands, even if the underlying production function is unknown. This result, involving ''shadow'' or ''virtual'' prices, is illustrated in the two-factor case by the CES production function and graphically in the three-factor case. Finally, the result is illustrated empirically (with four production factors), this time by the GL cost function.