Short Run in Economics: Definition, How It Works, and Examples

Key takeaways

• The short run is a timeframe in which at least one input (commonly capital) is fixed while other inputs (like labor and materials) can vary.
• Firms optimize production in the short run by balancing marginal cost and marginal revenue.
• Short-run constraints — fixed inputs, contracts, and leases — limit flexibility and can raise operational risk.
• The long run contrasts with the short run: in the long run all inputs are variable and firms can fully adjust scale and technology.

What the short run means

In microeconomics, the short run describes a period during which one or more factors of production cannot be changed. Typical fixed inputs include capital items such as machinery, buildings, or long-term contracts. Variable inputs—labor, materials, and energy—can be adjusted more quickly.

The term does not refer to a specific duration; it depends on the industry, firm, and which inputs are adjustable.

How firms make short-run decisions

The main objective in the short run is to choose the output level that maximizes profit or minimizes losses given fixed inputs.

Key concepts:
* Marginal analysis: Firms compare marginal revenue (MR) and marginal cost (MC). Profit is maximized where MR = MC.
* Marginal product and diminishing returns: Adding more of a variable input initially raises output, but the additional output per unit eventually falls (the law of diminishing marginal returns). This raises marginal cost as more input is added.
* Cost classification: Fixed costs do not change with output in the short run (rent, long-term wages, depreciation). Variable costs change with production (materials, hourly wages, fuel).

External factors such as demand shifts and input price changes also influence short-run choices. Firms may temporarily increase labor or use assets more intensively when demand rises, or cut back on variable inputs when demand falls.

Limitations of short-run strategies

Short-run decision making faces several constraints:
* Fixed inputs: Contracts, leased capital, and installed equipment limit the ability to scale production quickly.
* Diminishing marginal returns: Increasing variable inputs against fixed capital eventually yields smaller output gains and higher marginal costs.
* Higher operational risk: Fixed costs must be paid even when output falls, increasing the risk of losses and cash-flow pressure.
* Short-term focus: Emphasis on immediate profitability can crowd out long-term investments in R&D, training, and capacity expansion.

Short run versus long run

• Short run: At least one fixed input; firms adjust variable inputs to respond to demand and price changes but cannot fully change scale.
• Long run: All inputs are variable; firms can alter capital, adopt new technologies, enter or exit markets, and achieve economies or diseconomies of scale.

In the long run firms aim to choose the scale of production that minimizes average cost, while short-run outcomes reflect existing constraints.

Example: airlines (short-run adjustments)

Airlines face large fixed costs (aircraft leases, gate fees, maintenance) that are hard to change in the short run. Typical short-run responses include:
* Adjusting flight schedules and aircraft size on routes.
* Using dynamic pricing to influence demand and improve load factors.
* Modifying labor schedules (overtime, temporary hires, voluntary leave).
* Hedging fuel costs to reduce short-term price volatility.

These actions alter variable costs and operations without changing the fixed capital base.

Frequently asked questions

Q: Why are some costs fixed in the short run?
A: Fixed costs are tied to inputs that cannot be adjusted immediately (e.g., long-term leases, permanent staff salaries, equipment). They remain constant regardless of short-term output changes.

Q: How do firms maximize profit in the short run?
A: By producing where marginal revenue equals marginal cost (MR = MC), given the fixed inputs and current market conditions.

Q: How do demand changes affect firms in the short run?
A: Firms adjust variable inputs and prices to match demand, but fixed inputs limit how much they can scale production quickly.

Q: What does a short-run supply curve show?
A: The relationship between price and the quantity firms are willing to produce given fixed inputs. It typically slopes upward: higher prices incentivize increased production by using more variable inputs.

Conclusion

The short run captures the practical constraints firms face when at least one input cannot be changed. Understanding short-run behavior—marginal analysis, fixed versus variable costs, and the law of diminishing returns—helps explain why firms make certain operational and pricing decisions before they can fully adjust scale and technology in the long run.