Short Run

Definition

The short run is a period of time in which at least one factor of production, typically capital, is fixed while other factors, such as labor, can be varied. This concept is central to understanding production and costs in the context of microeconomic analysis.

5 Must Know Facts For Your Next Test

1. In the short run, a firm can only increase output by increasing the use of variable inputs, such as labor, while the quantity of fixed inputs, such as capital, remains constant.
2. The distinction between the short run and the long run is crucial for understanding a firm's production decisions and cost structures.
3. Explicit costs, which are out-of-pocket expenses, and implicit costs, which represent the opportunity cost of using owned resources, are both considered in the short-run analysis of a firm's economic profit.
4. The law of diminishing returns, which states that as more variable inputs are added to a fixed input, the marginal product of the variable input will eventually decrease, is a key concept in the short-run production function.
5. The shape of the short-run cost curves, such as the U-shaped average cost curve, is directly influenced by the law of diminishing returns and the firm's ability to adjust its variable inputs in the short run.

Review Questions

• Explain how the distinction between the short run and the long run affects a firm's production decisions and cost structures.
  • The distinction between the short run and the long run is crucial for understanding a firm's production decisions and cost structures. In the short run, at least one factor of production, typically capital, is fixed, while other factors, such as labor, can be varied. This means that in the short run, a firm can only increase output by increasing the use of variable inputs, such as labor. The firm's cost structure in the short run is characterized by fixed costs, which do not vary with output, and variable costs, which change in proportion to the level of output. This distinction is important because it allows the firm to analyze its production and cost decisions more effectively, taking into account the constraints and opportunities presented by the short-run and long-run time frames.
• Describe how the concept of the law of diminishing returns relates to the short-run production function and the firm's cost curves.
  • The law of diminishing returns is a key concept in the short-run production function. It states that as more variable inputs are added to a fixed input, the marginal product of the variable input will eventually decrease. This means that at some point, adding more of a variable input, such as labor, will result in a smaller increase in output. This relationship directly influences the shape of the firm's short-run cost curves, such as the U-shaped average cost curve. As the firm increases production in the short run by adding more variable inputs, the law of diminishing returns causes the marginal cost and average cost to eventually rise, leading to the U-shaped cost curves. Understanding the interplay between the law of diminishing returns and the firm's short-run production function is crucial for analyzing the firm's cost structures and decision-making.
• Analyze how the distinction between explicit costs and implicit costs affects the calculation of a firm's economic profit in the short run.
  • In the short-run analysis of a firm's economic profit, both explicit costs and implicit costs must be considered. Explicit costs are the out-of-pocket expenses incurred by the firm, such as payments for labor, raw materials, and other variable inputs. Implicit costs represent the opportunity cost of using the firm's owned resources, such as the value of the owner's time or the use of the firm's capital equipment. The distinction between explicit and implicit costs is important because economic profit is calculated as the difference between a firm's total revenue and its total economic cost, which includes both explicit and implicit costs. Ignoring implicit costs would lead to an overestimation of the firm's economic profit, as it would only consider the accounting profit and not the true opportunity cost of the firm's resources. By incorporating both explicit and implicit costs, the firm can accurately assess its economic profit in the short run and make more informed production and investment decisions.

Related terms

Long Run: The long run is a period of time in which all factors of production can be varied, allowing a firm to adjust its scale of operations to achieve the most efficient level of production.

Fixed Costs: Fixed costs are expenses that do not vary with the level of output, such as rent, insurance, and depreciation of capital equipment.

Variable Costs: Variable costs are expenses that change in proportion to the level of output, such as raw materials, labor, and energy.