What it means
OpenStax explains that fixed inputs, such as capital, cannot be changed easily in a short period of time. So in the short run the only way to change output is to change the variable inputs, such as labour or materials.
In the long run, all inputs can be varied. Investopedia adds that the short run is not a set number of months.
For a street food stall it might be a week, and for a steel mill it might be several years. It is the time over which something stays fixed, such as a lease, a contract or a machine.
This fixed element creates fixed costs. The cost of fixed inputs must be paid before production starts, and it does not change with the level of output.
Variable costs rise as output rises, and total cost is the sum of the two. OpenStax defines marginal cost as the additional cost of producing one more unit, written as the change in total cost divided by the change in quantity.
Because fixed cost does not change, marginal cost in the short run comes from variable inputs only. Average cost is total cost divided by output.
Investopedia says a firm maximizes profit in the short run where marginal cost equals marginal revenue. Firms often cannot cut staff or exit a lease quickly, so they may accept lower profit for a time.
A hospital with fewer patients than expected still pays its permanent staff, for example. In the short run, a firm facing weak demand has fewer options than in the long run.
It can cut hours, pause hiring or change prices, but it cannot easily change the size of its plant. Rules, contracts and local conditions vary, so check the terms that bind a given firm.
In practice
Real-world examples.
Example
A fictional bakery rents an oven for 2,000 a month, which is a fixed cost. It pays 3 per loaf for flour and labour. At 1,000 loaves the total cost is 5,000 and at 1,001 loaves it is 5,003, so the marginal cost is 3.
Example
A fictional firm has fixed cost of 10,000 and variable cost of 4 per unit. At 500 units the total cost is 12,000 and the average cost is 24. At 1,000 units the total cost is 14,000 and the average cost is 14.
Example
A fictional shop sells each unit for 9 and has marginal cost of 4. Each extra unit adds 5 to profit, so it keeps producing while marginal revenue stays above marginal cost. If its lease is fixed at 3,000 a month, it must still pay that even if it sells nothing.
Formula
Calculation
Total cost = Fixed cost + Variable cost. With 10,000 + 4 x 500 = 12,000.
Marginal cost = Change in total cost / Change in quantity. With (5,003 - 5,000) / (1,001 - 1,000) = 3.
Average total cost = Total cost / Quantity. With 14,000 / 1,000 = 14.Case study
Seen in the real world.
This case study is fictional and illustrative. Hannah, 36, in Leeds, runs a small print shop with a leased press that costs $1,800 a month. A large order arrives, and she wants to know if she can take it this week. The press is fixed, so she cannot add a second machine in the short run.
She can pay overtime and buy more paper, which are variable costs. She finds that each extra 100 prints cost $40 in paper and ink and $30 in overtime. Her selling price is $120 per 100, so each batch adds $50 to profit. She accepts the order up to the press limit.
She plans to lease a second machine only if demand stays high for several months. The $1,800 lease is the same whether she prints one batch or fifty, so it plays no part in the decision to accept the extra order. If the press can print at most 40 batches in the week, the extra order can add at most 40 x $50 = $2,000 of profit, which is more than the monthly lease and tells her that a second machine is worth considering.
Watch out
Common mistakes.
- Treating the short run as a fixed length of time, when it depends on which inputs are fixed.
- Counting fixed cost in marginal cost, when only variable inputs change with output in the short run.
- Assuming a firm can resize its plant quickly when demand changes.
Questions
People also ask.
What is the short run in economics?
It is a period in which at least one input is fixed while others can change. A firm can change variable inputs but not its plant.
How long is the short run?
There is no set time. It lasts as long as some input, such as a lease or machine, cannot be changed.
What is the difference between short run and long run?
In the long run all inputs can be varied, so a firm can change its plant size. In the short run it cannot.
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