Overview
Often times economists will refer to different time frames over which certain economic forces take effect, which provide the context by which a given model should be interpreted or tested.
- Short Run : the short term is the shortest time frame. The short run time frame usually means that some variables in an economic model are fixed because the time frame is so short, but long enough for others to change. In many macro models, the short run is the time frame where prices are constant, due to stickiness, but other forces are allowed to play out.
- Medium Term: is a fuzzy middle ground between the short run and the long run. It is often not referred to, unless one is examining the process of price movements and discovery after a change has occurred, or if there is a time frame where some economic forces not present in the short term are present, but there are still some long term forces that are still held fixed.
- Long Run: is typically defined to the be interval of time long enough where prices have enough time to adjust reach a new equilibrium after some change has occurred that moves the economy off its equilibrium state.
Effects on Aggregate Supply and Demand
In the short run, the supply curve is relatively flat. This is a result of the assumption that prices are sticky. That is, we assume that companies have set a given fixed price for their products, and even if they see an uptick in demand over the short run, they do not raise prices immediately. Instead, they increase employee hours and run their machines longer in order to produce more product and meet the demand. The net effect of this is that the price is fixed, and the quantity produced rises or lowers based on current demand.
In the long term, the supply curve is vertical, that is, changes in demand effectively just cause price inflation. This is effectively of assuming the production function as follows.
{% Y = F(K,L) %}
In the long run, economists assume that the amount of capital {% K %} and the amount of labor {% L %} is fixed. That is, an employer can ask their employees to work overtime
in the short run, but in the long run, they will increase their prices until overtime is no longer needed.