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In Economics, what is a Short-Run?
The short-run is an economic concept that refers to the period of time during which production volume is necessarily fixed since it is not possible to increase production capacity. Any point in time beyond the short-run is the long-run; the main implication is that the long-run is that period of time sufficient to allow production capacity to be increased. Both the short- and long-run are important concepts for fundamental demand-supply analysis and hence for analyzing the behavior of market prices. The concepts may be applied to an individual, firm, industry, sector, or overall economy.
In terms of price analysis, a supply decrease or demand increase causes a price to increase in the short-run. This is because, by definition, there is not enough time for producers to adjust production capacity. In the long-run, however, capacity can be adjusted in line with changed supply or demand conditions so that price can be restored to its original level.
For example, if a frost destroys the sugar crop in Brazil, the world price of sugar that season would spike since only one sugar crop can be planted each season. The production capacity of other supply regions cannot be increased to compensate for the loss of Brazil's production capacity. Sugar buyers around the world would bid up the price to secure a share of the limited supply, and the price would remain high until the next season. In the short-run, the price of sugar would increase. In the long-run, by next season, the price would be restored to its normal level as Brazil comes back into production.
The length of the short-run varies depending on the period of time required to install new productive capacity. That, in turn, varies from industry to industry. The time required can depend on the quantity and nature of the resources required to expand capacity, as well as the operational, regulatory, or technical constraints that apply.
For example, an individual training to be a hairdresser can increase his or her capacity quicker than one training to be a doctor. An office cleaning firm can increase its production capacity quicker than a resource company that has to explore and find a new resource deposit. A table manufacturer can increase its production capacity quicker than a satellite company can launch a new satellite.
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![In terms of price analysis, a supply decrease or demand increase causes a price to increase in the short-run.]()
By: Rehan QureshiIn terms of price analysis, a supply decrease or demand increase causes a price to increase in the short-run.
Discussion Comments
@anon83393-- Are you talking about the idea of "responsiveness to demand?"
I completely agree with you though, I have some homework on production capacity and responsiveness to demand in the short-run and this is the only place that actually helped me understand!
I thought that short-run and long-run are specific periods of time that applies for everything. I didn't know that it depends on the industry and manufacturer. I'm just understanding now that responsiveness to demand depends on production capacity. The more production capacity a manufacturer has, the more responsive it is to demand in the short-run.
I'm going to score a hundred on my homework this time! :)
@simrin-- No, I don't think that's possible. The technical definition of short-run is that at least one input of production is fixed, meaning that it cannot be changed.
So let's say you are a bread maker and the demand for bread suddenly increased. You can probably get a hold of more ingredients quickly and have your bakers work an extra shift to make more bread. But if you only have one oven and no time or money to get another one, your production is still going to be limited. (The oven is the fixed input). And since you won't be able to fulfill all of demand, the prices will go up.
In the long-run though, you can buy another oven and make more bread to meet demands. So even if prices increased at first, they will go back to normal once your production increases.
Okay, if I understood this right, it means that prices in the short-run supply will always increase, right?
Since short-run and long-run are about increasing production capacity (and not decreasing), would there ever be a situation where prices would actually decrease instead of increase?
Very good little snapshot explanation. Relating the concept to production capacity is spot-on - a point often overlooked or missed completely
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