Short Run

A term used to describe a conceptualized period of time

What is a Short Run?

A short run is a term widely used in economics – or microeconomics, more specifically – to describe a conceptualized period of time. A short run doesn’t so much describe literal time, as it describes a period in which production inputs being considered are a combination of variable inputs and fixed inputs. When we say input, we mean pieces of information or factors that exert a direct impact on how a business operates and its production output.

 

Short Run

 

Summary

  • A short run is a term utilized in economics – more specifically in microeconomics – that is designed to delineate a conceptualized period of time, not a specific period of time such as “three months.”
  • A short run is characterized by the presence of at least one fixed input, with the rest being variable; input refers to factors or elements that directly affect a company’s operations and resulting output.
  • The Company ABC example provided below illustrates how short run is the time during which the company is able to acquire additional resources (and increase labor hours) to boost production to match an expected increase in demand – variable inputs – but some inputs, such as major production equipment, are considered fixed over the short run, as they cannot be rapidly transformed.

 

Understanding Short Run

Economists Robin Bade and Michael Parkin illustrated the definition of a short run in the second edition of their book, “Essential Foundations of Economics.” Bade and Parkin explain that in a “short run,” at least one input being considered must be fixed. All other pieces of input can be variable.

A “long run” then, in this context, is a period in which all the potential aspects of input are considered as being variable. According to Bade and Parkin, over the long run, a company can make changes to virtually any aspect of its operations – thus, all long run inputs are considered at least potentially variable.

It’s important to understand that within the economic delineation of a short run, it can’t be pinned down to, or designated by, a specified period of time. For example, one can’t say that a long run is twelve months, and a short run is three months. A short run – and a long run, for that matter – are only distinguishable by the number of fixed and/or variable inputs being considered. Also, distinctions between short and long runs tend to vary considerably from one industry to the next.

The concepts of short run and long run are related to the notion that a company’s or industry’s response to changing economic or market conditions will, at least in part, depend upon the time frame within which the company or industry must react to the changes in supply or demand that will impact its operations.

Faced with a short-run change in market conditions, a company will likely act one way, while when faced with more enduring, long-run changes, the company will take different measures in response to the changed conditions in the marketplace.

 

A Short Run Example: Company ABC

Company ABC is a farmer’s market that sells all types of baked goods, as well as particularly perfect pumpkins. With fall approaching, Company ABC is preparing for a surge in demand for pumpkins and baked goods. During the forthcoming surge, what period of time is considered a short run?

To start, we need to consider at least one piece of fixed input, with the rest being variable. So, let’s take a look at the input required for Company ABC to produce sufficient output to meet the anticipated demand surge.

In terms of labor, more labor hours will likely need to be logged to meet the needs presented by increased customer demand. In such a case, Company ABC will most likely move to cover this need by getting existing employees to take on extra shifts or work longer shifts. It means that labor and labor costs are a variable input.

The same would be true when it comes to ordering raw materials for the production of baked goods and even in terms of ordering additional seeds to plant more pumpkins. All can be done with little stress on the company, meaning the input is easily variable.

 

Fixed and Variable Inputs

So, what about fixed input? Company ABC’s surge in demand is going to happen quickly and will last only about as long as consumers want/need baked goods for the holidays and pumpkins for fall decorating. In short, the upsurge in demand is likely only going to be in effect over a period of a few months.

Buying new equipment (think mixers, ovens, or even harvesting equipment) is most likely going to be considered a long run, variable type of input because it would take a significant amount of time to buy and install said equipment and then train appropriate staff to use it.

From a long-run perspective, the amount of production equipment the company owns is a variable input. However, from a short-run perspective, the amount of production equipment is a fixed limitation on the company’s operations, as it cannot be easily adjusted within the short-run time frame.

In our example, the short run is the time during which Company ABC can acquire additional labor and raw materials to boost production to meet the fall time surge in demand.

 

Keep Reading

CFI is the official provider of the global Certified Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

  • Aggregate Demand
  • Excess Capacity
  • Long-Run Supply
  • Variable Costs

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