The Short-Run Expansion Path for the Firm

Abstract

There is some confusion about the nature of the short-run expansion path (SREP) for the firm as presented in many intermediate microeconomics textbooks. The traditional view is that the SREP is a horizontal line because the firm is stuck with a fixed amount of capital. However, this view does not usually acknowledge that the firm could choose to idle some of its capital when seeking to reduce its output in the short run. The authors show that the traditional horizontal SREP is not invalidated when they explicitly allow for such capital reductions; in fact, it is the optimal path for the firm in the short run.

Keywords:

• cost minimization
• expansion path
• isocost
• isoquant
• short run