Economics Short Run Concepts

Study Notes

Short Run vs. Long Run in Economics

Short run is defined as the period during which certain factors of production remain fixed.
Typically, capital (plant and equipment) is regarded as fixed during the short run.
Firms cannot change their scale of operations in the short run due to fixed capital constraints.
All factors of production become variable in the long run, enabling firms to adjust operations freely.
In the long run, firms can allow leases to expire and sell equipment, thus eliminating short-run fixed costs.

Shutdown and Breakeven Analysis

A retail store example illustrates concepts of fixed costs, quasi-fixed costs, and variable costs.
Fixed costs include a one-year lease, while a quasi-fixed cost involves maintaining one employee.
Variable costs are determined by the store's merchandise costs.

Breakeven Point

Breakeven occurs when total sales cover fixed and variable costs.
At breakeven output, price equals both average revenue and average total cost, resulting in zero economic profit.

Short Run Operations

In the short run, the store should continue operations if selling price exceeds variable costs.
Selling items below average variable cost necessitates shutdown to reduce losses.

Long Run Decision Making

In the long run, a firm should shut down if the price falls below average total cost, irrespective of the relationship with average variable cost.

Perfect Competition Insights

Under perfect competition, firms are price-takers with profits influenced by pricing.
A graphical representation of cost functions helps analyze profitability at different output prices.
At price P1:
- Price and average revenue equal average total cost.
- Output level at Point A results in zero economic profit.
Prices above P1 yield positive economic profit, whereas prices below P1 lead to economic losses.

Description

This quiz focuses on the concept of the short run in economics, particularly for firms. It emphasizes the fixed factors of production, primarily capital, that affect operational scale during this period. Test your understanding of how short run constraints differ from long run flexibility in production.