Short-term: Short-term is a period in which some factors are fixed and some factors are variable. Fixed factors have fixed cost and variable factors have variable cost.. Therefore, law of variable proportion applies here. In short-term, output can be increased or decreased by changing variable factors only, but fixed factors cannot be varied.

The distinguishing characteristics of short-term is that certain factor-inputs are fixed in character, while other factor inputs are variable in nature only. The level of production can be changed. The scale of production cannot be changed.

The behavior of output when one output and one input is varied and others are held constant, is studied under the ‘law of variable proportions’. It is also known as the ‘Law of Diminishing Returns’ and the ‘Law of Non-proportional Returns.’

Long-term: Long period or long-term is defined as that period of time in which all factors of production or inputs are variable. Distinction between fixed and variable inputs obtains only in the short-term. In the long-term, all inputs become variable, i.e. the scale of production itself can be changed by installing new plant and equipment and hiring more labour and other factor inputs.

The behaviour of output when all inputs are varied, is studied under the “law of returns to scale”.