Short Run

Short run is a period of during which the quantities of at least one input is fixed and the quantities of the other inputs can be varied. In the short run some inputs are variable. New firms do not enter into the industry and the existing firms do not exit. The costs that are fixed have no impact on a firm's short-run decisions, since only variable costs and revenues affect short-run profits.

In the short run there are imbalances in supply and demand. The increased demand may encounter shortages till the resources can be shifted into it and likewise when the decreasing demand sees excess supply. An increase in the demand or decrease in the supply causes the price to increase in the short run. This is because there not enough time or producers to adjust production capacity.

A profit maximizing firm in the short run will

• increase the production if marginal cost is less than marginal revenue i.e. added revenue per additional unit of output;
• decrease the production if marginal cost is greater than marginal revenue;
• continue to produce if average variable cost is less than price per unit, if the average total cost is greater than price;
• Shut down if the average variable cost of the product or service is greater than price at each level of output.

The period of time for short-run depends upon the time required to install new productive capacity. This varies from industry to industry. The time required depends on the quantity and nature of the resources required to expand capacity, as well as the operational, regulatory, or technical constraints that apply.

In the short run, the law of diminishing returns would state that as the firm adds more units of a variable input i.e. labour or raw materials to the fixed amounts of land and capital, the change in total output will at first rise and then fall. 

Questions

• What is a short run?
• What are the characteristics of a short run?
• What would a profit maximizing firm do in the short run?