Loading the player...

What is the 'Short Run'

The short run, in economics, expresses the concept that an economy behaves differently depending on the length of time it has to react to certain stimuli. The short run does not refer to a specific duration of time but rather is unique to the firm, industry or economic variable being studied. A key principle guiding the concept of short run and long run is that in the short run, firms face both variable and fixed costs, which means that output, wages and prices do not have full freedom to reach a new equilibrium.

BREAKING DOWN 'Short Run'

This constraint differs from the long run, which is considered to contain only fixed costs. In the short run, leases, contracts and wage agreements limit a firm's ability to adjust production or wages in order to maintain a rate of profit. If a hospital experiences lower than expected demand in a given year, but its entire employment force of doctors, nurses and technicians is under contract for the duration of the year, then the hospital has no choice but to swallow a cut in its profit. In the long run, firms in capital-intensive industries, such as oil and mining, have time to expand or shrink operations in factories or investments in correspondence with changing demand, but in the short run, they are unable to capitalize on changes in demand with the same degree of flexibility.

Real-World Examples of Short Run Costs

Mining and energy giants have been hit especially hard by the fall in iron ore, coal, copper and other commodity prices, underscoring their high fixed costs in the short run; Glencore lost $5 billion in 2015, while Vale lost $12 billion, and Rio Tinto lost $866 million. Despite lower prices, these firms continue to ramp up production due to new investments, particularly in areas such as Brazil and Australia, made when commodity prices were significantly higher around 2011. For instance, Glencore purchased Xstrata in 2013 for $30 billion in a deal in which it acquired most of its mining assets, which have depreciated greatly in value.

In the analysis of short-run versus long-run costs, it is important to understand the behavior of the firms. In certain situations, it may be preferable to keep operating an unprofitable firm over the short run if this helps to partially offset costs that are fixed. In the long run, however, an unprofitable firm will be able to terminate its leases and wage agreements and shut down operations

RELATED TERMS
  1. Long Run

    A period of time in which all factors of production and costs ...
  2. Fixed Cost

    A cost that does not change with an increase or decrease in the ...
  3. Run

    A series of price movements that occur in the same direction ...
  4. Run Rate

    1. How the financial performance of a company would look if you ...
  5. Operating Cost

    Expenses associated with the maintenance and administration of ...
  6. Operating Leverage

    Operating leverage is a measurement of the degree to which a ...
Related Articles
  1. Small Business

    What Does Short Run Mean?

    Short run is the concept that for a business, at least one factor of production is fixed while others are variable.
  2. Investing

    What Does Long Run Mean?

    A long run is a period of time in which all factors of a business’ production and costs are variable.
  3. Investing

    What's a Run Rate?

    Run rate is a term used to denote annualized earnings extrapolated from a shorter time frame. Management uses the run rate to estimate future revenues.
  4. Investing

    The Operating Leverage And DOL

    Operating leverage tells investors about the relationship between a company's fixed and variable costs. The higher a company's fixed costs in relation to its variable costs, the greater its operating ...
  5. Investing

    What are Fixed Costs?

    Fixed costs are business expenses that do not change as the level of production goes up or down. They are one of two types of business expense, the other being variable costs. Variable costs ...
  6. Personal Finance

    Financial Career Shift: Get In The Driver's Seat

    Before you agree to work for another investment firm, be sure you know what you're getting into.
  7. Investing

    Fixed Income Trader: Career Path & Qualifications

    Discover the career path the most fixed income traders follow and learn more about the qualifications needed and the average salary they earn.
  8. Investing

    Fixed Income Trader: Job Description & Average Salary

    Learn about the skill requirements and average salary of a fixed income trader, along with the necessary licenses and daily activities.
  9. Small Business

    What is a Firm?

    A firm is a business or organization that sells goods or services on a for-profit basis.
RELATED FAQS
  1. What is the difference between run rate and running costs?

    Learn about the differences between run rate and running costs, two very different and very limited terms used in business ... Read Answer >>
  2. Why are microeconomic models different in the short run than the long run

    Find out why short-run and long-run microeconomic models treat production, costs and variable change using different given ... Read Answer >>
  3. What are some of the limitations of run rates?

    Understand what a run rate is and why a company would look to calculate it. Learn about the various limitations of relying ... Read Answer >>
  4. When do I need to project run rates for my business?

    Learn some of the reasons why businesses project run rates; discover why companies rely on such a simple metric and how it ... Read Answer >>
  5. How are fixed costs treated in cost accounting?

    Learn how fixed costs and variable costs are used in cost accounting to help a company's management in budgeting and controlling ... Read Answer >>
  6. Is it better for a company to have fixed or variable costs?

    Understand the difference between a fixed cost and a variable cost, and learn how a company benefits from having more fixed ... Read Answer >>
Hot Definitions
  1. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  2. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  3. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  4. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  5. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  6. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
Trading Center