Short-run
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In economics, the concept of the short-run refers to the decision-making time frame of a firm in which at least one factor of production is fixed. Costs which are fixed in the short-run have no impact on a firms decisions. For example a firm can raise output by increasing the amount of labour through overtime.
A generic firm can make three changes in the short-run:
- Increase production
- Decrease production
- Shut down
In the short-run, a profit maximizing firm will:
- Increase production if marginal cost is less than price;
- Decrease production if marginal cost is greater than price;
- Continue producing if average variable cost is less than price, even if average total cost is greater than price;
- Shut down if average variable cost is greater than price. Thus, the average variable cost is the largest loss a firm can incur in the short-run.
See also
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