Economics Glossary: L -, Learning Economics... Solved!


Economics Glossary: L

Labor – The work time and effort that people commit to producing the goods and services in the economy.

Labor demand curve – a graph that shows the quantity of labor that firms will want to employ at every given wage rate.

Labor force – The sum of the number of people both employed and unemployed (labor force = employed + unemployed).

Labor force participation rate – The ratio of the labor force to the total population that is over 16 years of age.  Labor force participation rate = labor force/total population (that can work).

Labor market – The input/factor market where households supply work in exchange for wages from firms that demand their labor.

Labor productivity – The amount of output that each worker can produce per hour.

Labor supply curve – A graph that shows the quantity of labor that households will want to supply at every given wage rate.

Labor-intensive technology – A production technique that use a larger amount of human labor relative to physical capital.

Laffer curve – The Laffer curve shows that there is some tax rate where the response in supply is large enough to have a decrease in the tax rate result in an increase in tax revenue.

Laissez-faire economy – From the French “allow [them] to do”.  This essentially means that we have an economy where individuals and firms are allowed to pursue their own self interest without any central delegation or regulation.

Land – The natural resources we use to produce goods and services.  Could actually be land, or oil, water, coal, gold, trees, etc.

Land market – The input/factor market where households supply and sell land or other property for rent.

Law of decreasing returns – As a business uses more of an input (with one input fixed) the marginal product of that variable input will eventually decrease.  Imagine hiring more cooks to cook in a kitchen with a fixed size.  Eventually the kitchen will become crowded and productivity will decline.

Law of Demand – The negative relationship between quantities demanded and price of a good.  Generally, as the price of a good or service rises, the quantity demanded falls, and as the price decreases, the quantity demanded rises.

Law of market forces – When there is a surplus in the supply and demand model, the price will fall.  When there is a shortage, the price will rise.  This occurs to bring the market back into equilibrium. 

Law of one price – If transaction and transportation costs are small, then the price of the same good should be the same in different countries.  This occurs because people will take advantage of arbitrage opportunities, meaning they can buy a good at a low price in one country and immediately sell it for more in another country until opportunities for profit disappear.

Law of supply – The positive relationship between quantities supplied of a good and its price.  For example, an increase in price will lead to a higher quantity of goods being supplied, while a lower price will lead to a lower quantity of goods being supplied.

Legal monopoly – A market where competition and entry are restricted by the government through an issue of a license, patent, copyright, or public franchise.  Generally done to take advantage of a natural monopoly condition.

Legal tender – Money that a government has required to be accepted for all forms of debt.

Lender of last resort – One of the functions of the Federal Reserve is that it provides funds to banks in trouble who cannot find any other source of loanable funds.

Life-cycle theory of consumption – A theory that household’s make lifetime consumption decisions based on their expectations of income over their entire lifetime.

Linear relationship – When the relationship on a graph is represented by a straight line.

Liquidity property of money – The property of money that makes it a good medium of exchange as well as a store of value.  Generally, paper money is portable and accepted by most people and businesses so that it is easily exchanged for goods and services.

LM curve – A curve illustrating the positive relationship between the equilibrium value of the interest rate and the aggregate output (income/Y) in the money market.

Long run – The time frame where the quantities of all resources/inputs can be changed.  Another way to think about it is there are no fixed inputs, everything is a variable input.

Long-run average cost curve – A curve that shows the lowest average total cost where it is possible to produce each output when the firm has enough time to change all inputs in the production process.

Loss – The negative income earned by an entrepreneur for running a business.

Lucas supply function – The supply function demonstrates the idea that output depends on the difference between the actual price level and the expected price level (as expected by firms, consumers, and the government).