Long Run and Short Run - Short Run

All production in real time occurs in the short run. The short run is the conceptual time period in which at least one factor of production is fixed in amount and others are variable in amount. Costs that are fixed, say from existing plant size, have no impact on a firm's short-run decisions, since only variable costs and revenues affect short-run profits. Such fixed costs raise the associated short-run average cost of an output leveong-run average cost if the amount of the fixed factor is better suited for a different output level. In the short run, a firm can raise output by increasing the amount of the variable factor(s), say labor through overtime.

A generic firm already producing in an industry can make three changes in the short run as a response to reach a posited equilibrium:

• increase production
• decrease production
• shut down.

In the short run, a profit-maximizing firm will:

• increase production if marginal cost is less than marginal revenue (added revenue per additional unit of output;
• decrease production if marginal cost is greater than marginal revenue;
• continue producing if average variable cost is less than price per unit, even if average total cost is greater than price;
• shut down if average variable cost is greater than price at each level of output.