Economics Short Run Concepts

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.