Short run production

What Is Short Run Production?

Short run production refers to a period in economics where at least one factor of production is fixed in quantity, while others are variable. This concept is fundamental to Microeconomics and the broader field of production theory, illustrating how firms adjust their output levels when they cannot immediately change all inputs. In the short run, a company's ability to increase or decrease its output is constrained by these fixed inputs, such as factory size or heavy machinery, while variable inputs like labor and raw materials can be altered relatively quickly to influence total output¹². Understanding short run production is crucial for analyzing a firm's operational decisions, cost structures, and supply responsiveness to market demand.

History and Origin

The foundational concepts underpinning short run production theory evolved within the broader development of economic thought, particularly with the refinement of production functions and cost analysis. Early economists like Anne Robert Jacques Turgot in the 18th century are credited with discussing the concept of diminishing returns in production, which is a key characteristic of the short run¹¹. The formalization of the production function, which describes the relationship between inputs and output, progressed significantly in the late 19th and early 20th centuries, with contributions from economists like J. H. von Thünen, Philip Wicksteed, and Knut Wicksell.⁸, ⁹, ¹⁰ These developments provided the analytical framework for distinguishing between time horizons where some inputs remain fixed (the short run) versus periods where all inputs can be adjusted (the long run). The academic paper "A Brief History of Production Functions" explores this evolution, highlighting how the concept became central to neoclassical economics.⁷

Key Takeaways

• Fixed and Variable Inputs: In short run production, at least one input (e.g., capital, land) is fixed, while others (e.g., labor, raw materials) are variable.
• Time, Not Calendar Duration: The "short run" is a conceptual period defined by the immobility of at least one input, not a specific calendar time frame.⁶
• Law of Diminishing Returns: A key principle in the short run is the Law of diminishing returns, where adding more units of a variable input to a fixed input eventually yields smaller increases in output.
• Operational Constraints: Firms face operational constraints in the short run due to fixed capacity, influencing their ability to scale production quickly to meet changes in demand.
• Cost Implications: The presence of fixed costs alongside variable costs shapes the firm's cost structure in the short run, impacting profitability and pricing decisions.

Formula and Calculation

While there isn't a single "short run production formula," the concept is best understood through the production function, which mathematically relates inputs to the maximum output that can be produced. In the short run, where capital (K) is often considered fixed and labor (L) is variable, a simplified production function might be expressed as:

Where:

• (Q) = Quantity of output produced
• (L) = Variable input (e.g., labor hours)
• (\bar{K}) = Fixed input (e.g., capital, plant size)

From this function, key short run production metrics like Marginal product of labor (MPL) and Average product of labor (APL) can be derived:

• Marginal Product of Labor (MPL): The additional output produced by adding one more unit of labor, holding all other inputs constant. $$MPL = \frac{\Delta Q}{\Delta L}$$
• Average Product of Labor (APL): Total output divided by the total units of labor employed. $$APL = \frac{Q}{L}$$

These calculations help firms analyze the productivity of their variable inputs within the confines of their fixed capacity.

Interpreting Short Run Production

Interpreting short run production involves understanding how changes in variable inputs affect output when some factors remain constant. As more units of a variable input, like labor, are added to a fixed input, total output will initially increase, often at an increasing rate. However, a crucial aspect of the short run is the onset of the Law of diminishing returns. This economic principle states that beyond a certain point, adding more units of a variable input to a fixed input will cause the marginal product of the variable input to decline. For example, a factory might see its output per worker decrease if too many workers are added to a fixed number of machines, leading to congestion and less efficient resource use.

This understanding is critical for firms as they manage capacity utilization and evaluate their short-term operational efficiency. Analyzing short run behavior helps businesses make tactical decisions regarding staffing levels and material procurement, directly influencing their cost curves and ultimately their short-term profitability.

Hypothetical Example

Consider "Sweet Treats Bakery," a small business specializing in artisanal bread. In the short run, Sweet Treats has a fixed production capacity: one oven, two large mixers, and a limited counter space in its existing location. Its variable inputs include bakers' hours, flour, sugar, and other ingredients.

Currently, Sweet Treats employs three bakers, producing 200 loaves of bread daily.

• Step 1: Increase Variable Input. To meet an unexpected surge in local demand, the owner decides to hire a fourth baker for the busy season, keeping the oven and mixers (fixed inputs) the same.
• Step 2: Observe Output Change. With four bakers, daily production increases to 260 loaves. The additional baker contributed 60 loaves ((260 - 200)), which is their Marginal product.
• Step 3: Analyze Diminishing Returns. If the owner then hires a fifth baker, total output might only increase to 290 loaves, meaning the fifth baker contributed only 30 loaves. This demonstrates the Law of diminishing returns in action. With too many bakers sharing limited oven and mixer space, they start getting in each other's way, and the efficiency of each additional baker decreases. The opportunity cost of hiring yet another baker might outweigh the diminishing returns.
• Step 4: Decision Making. The owner must decide if the marginal revenue from the additional loaves outweighs the marginal cost of the extra baker, aiming for Profit maximization within the short-run constraints. Beyond a certain point, adding more bakers will not be financially viable due to the fixed capacity.

Practical Applications

Short run production analysis is integral to business strategy and economic forecasting. Businesses constantly make short-run decisions, such as adjusting staffing levels, ordering raw materials, or managing inventory, all within their existing operational footprint. For example, an automobile manufacturer might increase shifts or overtime (variable labor) to meet a temporary spike in car demand, but they cannot immediately build a new factory (fixed capital).

Economists and policymakers also use data on industrial output, which reflects short-run adjustments, to gauge economic health. The Federal Reserve, for instance, publishes data on Federal Reserve Industrial Production and capacity utilization, showing how much factories, mines, and utilities are producing relative to their maximum potential.⁵ Similarly, the OECD Industrial Production index provides insights into the volume of production output across various industrial sectors globally, measured against a reference period.⁴ This data helps analyze the current state of supply and demand and overall market equilibrium.

Limitations and Criticisms

While essential for understanding immediate business operations, short run production models have inherent limitations. One primary criticism is their simplifying assumption that certain inputs are absolutely fixed. In reality, what constitutes a "fixed" input can vary significantly by industry and context; for some, even machinery can be leased or expanded relatively quickly. The abstract nature of the "short run" also means it is not defined by a specific calendar period, which can make real-world application challenging.³

Furthermore, the model's reliance on the Law of diminishing returns assumes that increasing variable inputs eventually leads to inefficiencies. While generally true, this might overlook scenarios where technological advancements or process improvements could mitigate diminishing returns, at least temporarily. Critics of neoclassical economic theory, which heavily utilizes the production function concept, sometimes point to its underlying assumptions as being overly simplistic or unrealistic, potentially lacking consistency when applied to complex economic growth and distribution issues.² The model also simplifies the notion of returns to scale by focusing on one fixed input, which might not fully capture the complexities of economies of scale that manifest over longer horizons.

Short Run Production vs. Long Run Production

The key distinction between short run production and Long run production lies in the flexibility of a firm's inputs. In the short run, at least one factor of production is fixed, meaning its quantity cannot be changed, regardless of the level of output desired. Typically, fixed inputs include capital assets like buildings, machinery, and land, which require significant time and investment to alter. Firms adjust output by varying only their flexible inputs, such as labor, raw materials, and energy.

Conversely, the long run is a conceptual period where all factors of production are considered variable. In this time frame, a firm has sufficient time to acquire new machinery, expand or construct new facilities, divest existing assets, or even exit an industry entirely. There are no fixed inputs in the long run; all costs become variable costs. This complete flexibility allows firms to choose the most efficient combination of inputs for any desired level of output, often leading to different optimal production strategies compared to the short run.

FAQs

Q1: Is the "short run" a specific amount of time, like six months?

No, the "short run" is a conceptual period in economics, not a calendar duration. It is defined by the existence of at least one fixed input that cannot be changed. The actual calendar time for a short run varies significantly by industry and the specific inputs being considered.¹ For a hot dog stand, the short run might be a day (the cart is fixed); for an airline, it could be years (the fleet of planes is fixed).

Q2: What are examples of fixed and variable inputs in the short run?

Fixed inputs in the short run are resources that cannot be easily changed in quantity, such as a factory building, large machinery, or long-term leases. Variable inputs are those that can be adjusted quickly, like labor hours, raw materials, or electricity used in production.

Q3: How does short run production impact a firm's costs?

In the short run, a firm faces both Fixed costs (associated with fixed inputs) and Variable costs (associated with variable inputs). Fixed costs must be paid regardless of output, while variable costs change with the level of production. Understanding this distinction is crucial for analyzing a firm's short-term profitability and its decisions regarding output levels.

Q4: Can a firm avoid losses in the short run?

A firm aims for Profit maximization. While a firm might operate at a loss in the short run, it will continue to produce as long as its total revenue covers its total variable costs. If revenue cannot even cover variable costs, the firm might choose to shut down temporarily to minimize losses, as fixed costs would be incurred whether production happens or not.

Q5: What is the significance of the Law of Diminishing Returns in short run production?

The Law of diminishing returns is highly significant because it explains why adding more and more of a variable input (e.g., labor) to a fixed input (e.g., machinery) will eventually lead to smaller and smaller increases in total output. This principle directly impacts a firm's short-run cost curves and its optimal level of production, highlighting efficiency limits.