The short run is a fixed period of time where production capacity cannot be increased, while the long run allows for an increase in capacity. In the short run, a decrease in supply or an increase in demand causes prices to rise, but in the long run, prices return to normal levels as capacity adjusts. The duration of the short period varies depending on the sector.
The short run is an economic concept which refers to the period of time during which the production volume is necessarily fixed since it is not possible to increase the production capacity. Any moment in time beyond the short run is the long run; the main consequence is that the long term is that period of time sufficient to allow for an increase in production capacity. Both the short and long run are important concepts for the fundamental analysis of supply and demand and therefore for the analysis of market price behavior. The concepts can be applied to an individual, firm, industry, sector or general economy.
In terms of price analysis, a decrease in supply or an increase in demand causes the price to rise in the short run. This is because, by definition, there is not enough time for producers to adjust production capacity. In the long run, however, capacity can be adjusted according to changing supply or demand conditions so that the price can be brought back to its original level.
For example, if a frost destroys the sugar crop in Brazil, the world price of sugar that season would rise as only one sugar crop can be planted each season. The production capacity of other supply regions cannot be increased to compensate for the loss of production capacity of Brazil. Sugar buyers around the world would drive up the price to secure a share of the tight supply, and the price would remain high into the next season. In the short term, the price of sugar would rise. In the longer term, by next season, the price would be brought back to its normal levels as Brazil gets back into production.
The duration of the short period varies according to the period of time required to install new production capacity. This, in turn, varies from one sector to another. The time required may depend on the amount and nature of resources required to expand capacity, as well as operational, regulatory, or technical constraints that apply.
For example, one-on-one training to be a hairdresser may increase one’s ability more rapidly than training to be a doctor. An office cleaning company can grow its production capacity faster than a company that has to scout and find a new resource cache. A table manufacturer can scale up its production capacity faster than a satellite company can launch a new satellite.
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