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 materials, machinery, etc., affecting the business operation 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.

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 demand and the aggregate amount of supply. However, the sudden increase in demand may result in higher product prices.

Inputs determine the cost of production. 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:

Example #1

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.

Example #2

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 packages 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.

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.

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 –

• Supply Curve
• Economic Equilibrium
• Demand Pull Inflation