Short Run Economics: Definition, Analysis & Key Concepts

Short run analysis manages cost efficiency using fixed and variable costs.

In economics, the terms "short run" and "long run" compare the effects of time on business performance or conditions. The short run assumes that a small time period introduces restrictions that don't exist in the long run. Short run calculations and observations may be used independently or compared directly with similar long run scenarios.

Economic Definitions

Many economics definitions of short run compare it with long run to illustrate the concepts of both. For instance, the book "Introduction to Economic Principles" defines short run as a period of time not long enough to allow change to certain economic conditions. In contrast, the long run is defined as a period of time that is long enough to encompass all economic conditions and variables.

How Variables Define Short-Run Analysis

When studying interactions between products and consumers over a short run, a company's investment in a factory, for example, is fixed and constant over the period being examined. As demand rises and falls, however, material and labor investment changes with demand. If demand increases sufficiently, there isn't time in the short run to build new factories to accommodate additional production. When demand falls in the short run, the company can cut back staffing, hours and material purchases, but its facilities remain constant.

Comparing the Long Run

Using the example above with a long run time scale, a company would look at a period of time in which factories and production facilities are also a variable. If demand rose sufficiently, there is sufficient time to add another plant to meet demand. With loss of demand, a plant could be shut down or sold. Short run and long run have no standard time frame attached, since different businesses have different requirements. For instance, a gift wrapping service could open and close locations in shopping malls quite quickly, while a do-it-yourself warehouse business must locate land and build before opening.

Using the Short Run Outlook

The short run is used primarily to analyze production for a single facility or department. A typical income statement covers a short run view. Revenues are compared against the sum of costs of goods sold, such as labor and materials, and fixed costs, such as building costs, administration, utilities and any other expense that must be paid regardless of sales volume. A manager controlling costs in the short run may have some savings available from fixed costs, but most of his decisions will involve adjusting costs of goods sold.