About midway through the semester of a microeconomics class, we start talking about “long-run” and “short-run” decision making. This concept can often be a confusing one. What is long run? A year, two years, ten years? Or is it a day? Like many things in your economics class, the answer requires a little more thought. In fact, on a multiple-choice test the answer would be “any of the above are possible.”
To tackle this question, let’s talk about marshmallows. And, specifically, a company that sells gourmet marshmallows.
For three years I lived in this awesome little town in New York. It was even named one of the coolest small towns in America. Way cooler than I am. I lived right on Main Street above a storefront. The previous downstairs occupant moved out, and what was moving in? A gourmet marshmallow company.
Gourmet marshmallows: I was pretty excited about it. I imagined a hot chocolate bar where you could pick out your marshmallows. I already had my go-to coffee shop in town, but maybe once in a while in the winter I might want a fancy hot chocolate. A few months later the store opened up, and it was super cute. There was no hot chocolate (at first), BUT you could buy mini s’mores!* Even better, any time I wanted marshmallows (which turns out to not be very often, and I never once got a s’more), they would be open. Their hours were from around 10am-8pm, EVERY DAY of the week.
Living above the marshmallow company, I often walked by it on the weekends. The sad thing was… there were rarely people in it. People strolling by made comments on how cute it was. However, if they were walking from the train arriving from NYC, they had already walked by a delicious coffee shop, ice cream shop, and popsicle shop. They probably weren’t in the market for overpriced balls of sugar, gelatin, and corn syrup.
And what about the weekdays? While I told you that this small town was considered the coolest in America, the town was MUCH quieter on the weekdays than the weekends. Yes, the coffee shop was still packed, and you could get a delicious sandwich for lunch among a lively crowd; but, for the most part, people were not wandering Main Street to stop by and buy marshmallows.
Let’s get back to economics and short and long-run decision-making. The definition for short run is that something is fixed. The definition for long run is that all things are variable.
Once the marshmallow company opened up, they were in a short-run situation. They had signed a rental lease with my landlord. For ease of explanation, let’s assume that cost was $2,000 per month. That cost was fixed. Could they vary anything? Yes! They could vary the hours that they were open and thus the hours that they hired someone to work there. They were currently open 70 hours a week. That means that they had to pay someone 70 hours x the hourly wage rate. In 2018, the minimum wage in New York State was $11.10. So, at a minimum, the marshmallow company was paying $777 per week on labor.
Review: Their fixed costs are $2,000 / month. Their variable costs are roughly $777 x 4 = $3,108 / month + costs of electricity, marshmallows, and other costs of staying open. Their total cost of fixed costs + variables costs are at least $5,108.
What is the short-run decision for the firm? It is how many hours should they operate. They have to pay the rent regardless, but they can vary the labor costs.
What should they do? They should open their doors as long as the expected revenue they will make during those hours is greater than the cost of paying their employee to operate. When should they operate? Well, the weekends! The weekends are when people are walking along Main Street, potentially ready to spend some money on marshmallows. During the weekdays when no one was coming in, their revenue probably didn’t cover their labor costs, so they should not open.
Much to my delight (so that I could tell my students), what did the marshmallow company do? They started cutting back their hours. First, it was closed one day a week. Then it was down to 4 days a week (Friday to Monday).
They were following sound economic decision-making! For more on shut-down decisions, refer back to this post on ice cream!
Should they even open their doors at all? That I’m not sure.
What are the long-run decisions for the firm? Here is where it gets fun. I imagine the long run as the person stepping back and thinking about the entire operation of the firm.
In a year, their lease would be over. They would no longer be required to pay rent. So, what should they do? Thinking about their next move is their long-run decision: they can change their lease, the hours that they operate, everything!
What did they do? They moved! While I no longer live in the town, a friend sent me a picture of their new, smaller storefront on the other end of town. This new storefront likely had a cheaper rent, and potentially was in a better part of town to sell marshmallows.
RECAP: The short-run decisions occurred when they were deciding how many hours to operate when they were required to pay rent with my landlord. The only thing they could adjust was labor. The long-run decision was where they should locate (if anywhere) so that they could pay a different rent. In the long run, they are adjusting both the rent and the labor.
So, for now, the marshmallow business continues to have a storefront. Hopefully it’s because their revenue outweighs their costs.
Side note: Should we feel sorry for this marshmallow company who struggles to attract customers? No. I was on the Anthropologie website recently, and they are selling their marshmallows. So, I’d say they’re doing pretty well. I am still skeptical that they should have a storefront. But, hey! It’s not my money.
Senior year of high school I was hanging out with some friends in the cafeteria during a break. I had one of these s'more bars. I was eating (and enjoying it), but I knew that I could make it. And, I could make it better. It was probably the first time I really had that realization. That weekend, I set out to make this s'mores pie.
This pie is so easy, and it is perfect to make with kids because you really can't mess it up. You just make a graham cracker crust (I recommend making your own... the store bought are just not as good). Add some chocolate. Top with marshmallows. Toast in the oven until it is done.
1 1/4 cup graham cracker crumbs (you can buy crumbs, or buy graham crackers and crumble them up. About one sleeve is enough)
1/4 cup sugar
1/3 cup butter
3/4 to 1 cup chocolate chips (any kind will work)
1 to 2 cups marshmallows
Preheat oven to 400. Melt the butter and then combine it with the sugar and graham crackers. Pour into a pie pan, and using your fingers pat it down into the pan.
Sprinkle on the chocolate chips to cover the bottom of the crust. Sprinkle on marshmallows.
Bake at 400 on a high rack (see below) for around 8 minutes. Keep watch - it is done with the marshmallows are toasted.
Enjoy immediately, or save for a treat later.
* My students make fun of my pronunciation s'mores… is there a correct pronunciation?