Short-run macroeconomics is an economic term for the study of supply and demand levels in a period of time before larger market forces can react. This period of time is known as the short run, which generally includes predictable behavior influenced by supply and demand. When demand levels rise in the short run, production levels will increase in that period of time and prices will rise in kind. The theory behind short-run macroeconomics states that certain production inputs, most notably labor and resources, will remain somewhat stagnant in this time period, preventing a complete reaction to the demand levels of consumers.
Macroeconomics is the study of the way economies react as a whole to such characteristics of the economy as inflation, employment, and production levels. This is in contrast to microeconomics, which concentrates instead on the financial decisions of the individuals within a specific economy. One of the main goals of those studying macroeconomics is to figure out how different economic stimuli the overall economy in different periods of time. Short-run macroeconomics is focused on levels of aggregate supply and demand in a period of time before market forces can properly react.
Increases or decreases in aggregate supply and aggregate demand are the driving forces between the concept of short-run macroeconomics. Aggregate supply is the total amount of production within the economy, while aggregate demand is the amount of need that consumers have for those products. These two forces will react to each other in the short run and will have an effect on prices. For example, a sudden decrease in the supply of a specific product will cause an increased demand for those products, forcing prices upward. The opposite reaction would occur if supply for a product suddenly increased.
What short-run macroeconomics assumes is that certain resources will not be available to producers in the short run. For example, imagine that a certain product is suddenly in great demand. Businesses selling that product will ramp up production as much as possible with the resources at their disposal, but they may not have enough employees or the production capacity to meet the demand. The supply is still short, forcing rising prices.
When the short run becomes the long run is one of the difficult things to ascertain about short-run macroeconomics. The short run and long run cannot be defined by any specific period of time. A loose definition of the long run is that it is the time period when market forces can fully mobilize resources and react to demand, thereby reaching market equilibrium.
