What Is Short Run?
A Short Run in economics refers to a manufacturing planning period in which a business tries to meet the market demand by keeping one or more production inputs fixed while changing others. It varies with industries and differs from the long run in that the latter considers all inputs as variables.
The concept applies to any production period in the future without time constraints, such as weekly or monthly deadlines. This conceptualized period usually reflects the sudden or seasonal demand for a specific type of product. Every production process involves multiple inputs that a business can change (variable) or not (fixed) depending on its output requirements. Anything from labor, costs, raw materialsRaw MaterialsRaw materials inventory is the cost of products in the inventory of the company which has not been used for finished products and work in progress inventory. Raw material inventory is part of inventory cost which is reported under current assets on the balance sheet., machinery, etc., affecting the business operationBusiness OperationBusiness operations refer to all those activities that the employees undertake within an organizational setup daily to produce goods and services for accomplishing the company's goals like profit generation. and final output are production inputs.
- Short run refers to a production planning arrangement wherein at least one production input remains fixed while the rest are variable. It is a brief period within which a business must react to changes in supply or demand.
- Sometimes due to sudden or seasonal demand, some inputs, but not all, need to be changed to achieve the desired output.
- Changing inputs, like the number of laborers, raw materials, etc., maintains the short run equilibrium. It marks the balance between aggregate demand and aggregate supply.
- It is different from long run production, where all inputs or resources become variable as businesses get enough time to respond to change in the demands.
How Does Short Run Work in Economics?
Every business, whether small or large, wants to generate more profits through more output. Many factors remain associated with production that these companies can choose to change or do not change per their output requirements. As production is a real-time operation, they need to identify their factors or inputs for effective production planning.
Inputs like labor and raw materials can be changed (variable), while factories and big machinery cannot be (fixed). Short and long runs are two common approaches that most businesses adopt now and then.
The former concept works where demand is sudden or seasonal. In such a scenario, the production needs to pace up to fulfill the orders received. Thus, to ensure the product supply for that particular time in the future, manufacturers have to increase the inputs. But since the demand is short-lived, at least one factor remains fixed while the rest factors get changed. It helps maintain the short run equilibrium, which marks the balance between the aggregate demandAggregate DemandAggregate Demand is the overall demand for all the goods and the services in a country and is expressed as the total amount of money which is exchanged for such goods and services. It is a relationship between all the things which are bought within the country with their prices. and the aggregate amount of supply. However, the sudden increase in demand may result in higher product prices.
Examples Of Short Run Costs
Inputs determine the cost of productionCost Of ProductionProduction Cost is the total capital amount that a Company spends in producing finished goods or offering specific services. You can calculate it by adding Direct Material cost, Direct Labor Cost, & Manufacturing Overhead Cost. . If a business decides to keep one or more factors fixed, it still has to burden its stationary costs. Likewise, changing other factors will add to extra expenditure. So, much like inputs, costs are both fixed and variable. However, these fixed and variable inputs and costs vary with companies, industries, and economies.
Let us consider the examples below to understand the concept even better:
Baker Susan employs 100 workers for a daily production of around 500 cakes using two machines and one processing plant. Throughout the year, the output remains smooth and easy to handle with the available resources. However, the demand for cakes increases to approximately 1000 a day during the Christmas week.
This rise in demand is already known to Susan, which keeps her prepared with everything beforehand. As a result, she hires 100 more labourers during that period, orders a sufficient volume of ingredients required, and discusses the requirements of machinery way ahead of Christmas to speed up the production.
Here, the plant is a fixed resource, which the baker cannot increase or change in such a short time. And labourers, ingredients, and machinery are variable inputs. In this case, the costs associated with fixed and variable inputs constitute the total short run cost for the baker.
In 2018, increased steel prices in the U.S. led to an increase in the costs of raw materials, causing Whirlpool Corp. to incur a huge loss. The global market is again witnessing a rise in prices of inventories and supplies amidst the COVID-19 pandemic. This shortage of raw materials is making consumers pay more for things they need. Eventually, manufacturers are bracing themselves for a short run production to meet this sudden demand.
Due to the rise in raw materials costs, the company increased its product prices by 12% in 2021 to cover the losses. Surprisingly, the increased prices of finished goods have hardly affected its sales figures. It happened because of increased consumer demand, government economic stimulus packagesEconomic Stimulus PackagesAn economic stimulus package is an attempt by any nation to stabilize the economy through monetary and fiscal policy expansion. It attempts to avert the economic slowdown, and getting out of recession by helping the private sector to recover and flourish, resulting in economic growth. to fight the pandemic, and consumer savings. Given the profits made by Whirlpool despite the pandemic-induced disruptions, almost every renowned brand is following the same approach.
The decision to raise product prices seems to have a positive impact on the overall output or GDP. The short run aggregate supply curve or SRAS curve below shows how the product price level is related to the yearly production or a nation’s GDP. Here, a price rise (P2) expands production and aggregate supply while price decline (P3) contracts production and aggregate supply.
Short Run vs Long Run
Both short and long run concepts depict how a production unit behaves given the available time to manufacture a set volume of products. Moreover, the number of products to be manufactured within a given period determines the number of inputs or resources required.
Let us consider that a business needs to produce a limited amount of specific units of goods in five days. Due to short-lived demand, all it can do is increase laborers and raw materials but not the machinery. In this case, labors and raw materials are variable inputs while the machinery remains fixed. Thus, it will become a short run production based on production planning by the firm.
On the other hand, if there is a deadline of seven months for bulk manufacturing, the manufacturer will likely get one or more machinery to speed up the production. If it happens, all inputs (laborers, raw materials, and machinery) will become variable. It will convert the whole production arrangement into a long run production.
In simple terms, at least one of the resources, costs, or other factors remain fixed in the short run. Usually, it is a time ranging from few weeks to up to six months. However, this short time makes it difficult for manufacturers to increase supply, which leads to higher product prices. But the long run is the state of production where all of these inputs are variable and continues for more than six months or one year. It gives them enough time to respond to changing demands.
Frequently Asked Questions (FAQs)
Short run refers to a production planning period where at least one input remains fixed while the rest are subject to change. It works when a business wants to achieve the target within a short duration due to the sudden or seasonal demand for a specific product.
Short run production is when at least one of the inputs or resources used in the process remains fixed while the rest get changed. In the long run, all the available inputs or resources are variable.
If a gifts maker has to manufacture set units of goods for Halloween in six days, it needs to increase laborers and raw materials but not the machinery. In this case, laborers and raw materials become variable inputs while the machinery remains fixed.
This has been a guide to what is Short Run and its definition. Here we how does short run work in economics along with examples and aggregate supply curves. You may also have a look at the following articles –