What Is the Short Run?
The short run is an economic concept that signifies that, within a certain future period, at least one input remains fixed while others are variable. This principle indicates that an economy behaves differently based on the length of time it has to react to particular stimuli. Importantly, the short run doesn’t refer to a defined period but is unique to the firm, industry, or economic variable being studied.
A key principle guiding the concept of the short run is that firms face both variable and fixed costs, meaning that output, wages, and prices do not entirely reach a new equilibrium. Equilibrium refers to a state in which opposing forces are balanced.
Understanding the Short Run
The short run as a constraint varies significantly from the long run. In the short run, leases, contracts, and wage agreements restrict a firm’s ability to adjust production or wages to maintain profitability. In contrast, in the long run, there are no fixed costs. Costs balance when a firm optimally produces the desired amount of goods at the lowest possible price.
For example, if a hospital experiences lower-than-expected demand within a year, but its workforce of doctors, nurses, and technicians is under an annual contract, the hospital must absorb a reduction in profits. In capital-intensive industries like oil and mining, firms need time to expand or shrink operations according to changing demand. However, in the short run, they cannot adjust as flexibly.
Important: The short run does not refer to a specific time period but rather relates to the firm’s, industry’s, or economic factor’s context.
Examples of Short Run Costs
Understanding the challenges facing businesses and industries in the short run versus the long run can be illustrated through several examples:
Mining and energy giants faced severe difficulties due to the fall in iron ore, coal, copper, and other commodity prices, highlighting their high fixed costs during the short run. Companies like Glencore and Vale saw significant financial losses tied to such immutable costs. Despite the reduced prices, these firms continued ramping up production due to investments made when commodity prices were higher.
In a specific instance, Glencore’s acquisition of Xstrata for $30 billion in 2013 resulted in owning considerable mining assets, which depreciated significantly afterward. This depreciation tied to high investment costs from previous periods showcases the short-run cost constraints.
In analyzing short run vs. long run costs, understanding that some firms might prefer to keep operating at a loss in the short run if it helps to partially offset fixed costs is crucial. Over the long run, however, these firms can terminate leases and wage agreements, allowing shutdowns
Key Takeaways
- The short run in business context implies that, at a certain future point, certain inputs will be fixed, while others remain variable.
- Economically, the short run means an economy’s behavior fluctuations are based on its absorption and reaction time to stimuli.
- The counterpart to the short run is the long run, which presents no fixed costs; costs are balanced to achieve the lowest possible price given the desired outputs.
Related Terms: long run, equilibrium, profit, commodity prices
