In price theory, the long-run is defined as the time period lang enough for the firm to be able to vary the quantities of all its factors of production rather than just same of them. For example, suppose that a firm uses labour, raw materials and machinery to make a particular product. Labour is bired on a weekly contract and raw materials take one month to arrive from date of order, while plant and machinery take two years to design, order, construct and install. The ‘long-run’ for this firm is therefore any period longer than two years, since over this time the firm can vary all its factors of production. The implication of the definition is that the ‘long-run’ is not a fixed period of time for all firms in all industries, but rather varies with the characteristics of an industry’s technology. The electricity industry requires five to six years to plan, construct and install new generating capacity, and so its ‘long-run’ is five to six years. Note also that although it is normally assumed that the long-run is determined by the time period required to extend plant capacity, this need not always be the case, and the definition of the long-run is perfectly neutral as regards which input (or inputs) actually determine the long-run.
The importance of the long-run in the theory of the firm is that it is long enough to permit the firm to choose the most efficient combination of inputs to produce any given output. Suppose a firm experiences an increase in demand. Initially, it can only expand output by increasing quantities of labour and raw materials, though if it expects the increase in demand to be reasonably permanent it will set in motion the process of increasing plant capacity. In deciding on the size of this increase, it can aim at the best combination of plant, labour and raw materials to produce the planned rate of output. In the meantime, however, it must work within the lirnitations of its existing plant, and this will involve it in using too little plant and too much labour (and possible other inputs) relative to that which it can achieve in the long-run. Hence it will tend to incur higher average costs of production than it will in the long-run, due to the fact that it is not able to use the most efficient input combination. More generally, the long-run is aften loosely taken as the period long enough for underlying tendencies to change to work themselves out fully. It was in this sense that Keynes was using the term in his famous dictum: ‘In the long-run we are all dead.’
Reference: The Penguin Dictionary of Economics, 3rd edt.