Short-run

The short-run in economics refers to a time period during which at least one factor of production is fixed, meaning that certain inputs cannot be adjusted to respond to changes in demand or market conditions.
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Updated: Jun 7, 2024

3 key takeaways

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  • The short-run is a period during which at least one input or factor of production remains fixed.
  • Firms in the short-run can adjust some, but not all, of their resources in response to changes in market conditions.
  • Understanding short-run dynamics helps in analyzing production costs, pricing decisions, and responses to economic fluctuations.

What is the short-run?

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In the context of economics, the short-run is defined as a period during which at least one input, such as capital, land, or equipment, is fixed. This period can vary depending on the industry and specific circumstances but generally refers to the timeframe in which firms cannot fully adjust their production capacity.

For example, a manufacturing company might not be able to quickly expand its factory size or purchase new machinery in response to a sudden increase in demand.

Characteristics of the short-run

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  • Fixed and variable inputs: In the short-run, firms have both fixed inputs (e.g., factory buildings, long-term contracts) and variable inputs (e.g., labor, raw materials) that can be adjusted.
  • Limited flexibility: The inability to change certain inputs means that firms have limited flexibility to respond to economic changes, leading to constraints in production adjustments.
  • Cost structure: The cost structure in the short-run includes fixed costs, which do not change with the level of output, and variable costs, which fluctuate with production levels.

Examples of short-run scenarios

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  1. Manufacturing: A car manufacturer might face a sudden surge in demand but cannot immediately expand its factory or acquire new machinery. The firm can hire more workers or increase shifts, but its production capacity is limited by the existing factory size.
  2. Retail: A retail store experiences a peak shopping season. While the store can hire temporary staff and increase inventory, it cannot quickly expand its physical space to accommodate more customers.

Short-run production and costs

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In the short-run, firms focus on optimizing the use of their variable inputs to maximize output within the constraints of their fixed inputs. The costs associated with production in the short-run can be categorized as:

  • Fixed costs: Costs that remain constant regardless of the level of output, such as rent, salaries of permanent staff, and loan repayments.
  • Variable costs: Costs that vary with the level of production, including raw materials, hourly wages, and utilities.

The relationship between output and costs in the short-run is captured by the concepts of marginal cost (the cost of producing one additional unit of output) and average cost (the total cost divided by the number of units produced).

Short-run supply and market behavior

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In the short-run, firms may face different supply constraints compared to the long-run. For instance:

  • Price adjustments: Firms might adjust prices to manage demand when production cannot be easily scaled up or down.
  • Inventory management: Businesses may rely on inventory adjustments to cope with short-term changes in demand.
  • Temporary measures: Firms might implement temporary measures such as overtime, leasing equipment, or using subcontractors to handle short-term increases in production.

Short-run vs. long-run

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Understanding the distinction between the short-run and long-run is essential for analyzing economic behavior:

  • Short-run: At least one input is fixed; firms operate within existing constraints and focus on optimizing variable inputs.
  • Long-run: All inputs are variable; firms can fully adjust their production capacity and resources in response to market conditions.

The short-run provides insights into how firms manage immediate challenges and opportunities, while the long-run perspective focuses on strategic planning and capacity expansion.

By examining short-run dynamics, economists and business managers can better understand production decisions, cost management, and the impact of market fluctuations on firms. This understanding is crucial for developing effective strategies to navigate both short-term challenges and long-term growth opportunities.



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Arti
AI Financial Assistant
Arti is a specialized AI Financial Assistant at Invezz, created to support the editorial team. He leverages both AI and the Invezz.com knowledge base, understands over 100,000... read more.