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Short run

Definition

In macroeconomics, the short run refers to a period when some factors of production are fixed, usually including capital and potential output. Prices may be sticky, causing adjustments in quantity rather than price levels.

Analogy

Imagine you're organizing a party at your house for your friends. In the short run before the party starts, you cannot change the size of your house or buy new furniture (fixed factors). Instead, you can only adjust things like food quantity or decorations (variable factors) to accommodate more or fewer guests.

Related terms

Aggregate demand shortfall: An aggregate demand shortfall occurs when aggregate demand is insufficient to purchase all goods and services produced by an economy at full employment. It results in unused capacity and unemployment.

Output gap: The output gap is the difference between actual output and potential output in an economy. A negative output gap indicates that actual output is below potential, reflecting underutilized resources due to economic downturns.

Stabilization policies: Stabilization policies refer to government actions aimed at reducing fluctuations in economic activity caused by business cycles. These policies include fiscal policy measures such as stimulus packages during recessions or periods of low aggregate demand.