Labour: The input that involves the physical and intellectual services of people, including training, education, and peoples’ abilities.
Labour force: The number of employed persons plus the number of persons counted as unemployed. Also known as the total labour force.
Labour force participation rate: The percentage of the working age population that is counted in the total labour force. Labour market: The supply and demand for workers.
Lagging indicators: Variables that tend to change after a change in the phase of the business cycle.
Laissez-faire: The economic concept that efficiency in the economy is best achieved through government non-intervention, so that people are left alone to pursue their own self interests.
Land: The factor of production that includes minerals, timber, and water, as well as the actual land itself.
Law of demand: “The quantity of a specific good or service that people are willing and able to purchase decreases as the price increases, and increases as the price decreases, as long as the price is the only thing that changes.”
Law of supply: “The quantity of a specific good or service that producers are willing and able to offer for sale increases as the price increases, and decreases as the price decreases, as long as the price is the only thing that changes.”
Leading indicators: Variables that tend to change prior to a change in the phase of the business cycle.
Limited resources: The part of the scarcity concept of economics that says that resources are not infinite.
Liquidity trap: A theory that a certain nominal interest rate exists where expansionary monetary policy would be ineffective in lowering interest rates any further.
Long run: A time frame long enough to make all inputs variable. No fixed inputs or fixed costs exist in the long run. Also called the planning horizon.
Long run aggregate supply curve: With the theory that in the long run all costs and prices have time to adjust, higher prices will not increase profits and therefore will not lead to an increase in real GDP. This makes the long run aggregate supply curve a vertical line. Many economists believe that the level of output associated with the vertical long run aggregate supply curve is at the level of potential GDP (the natural rate of unemployment).
Long run average total cost: In the long run, all costs are variable, and all short run situations are possible. The long run average total cost curve connects all possible short run average total cost curves. This can take different shapes, but a downward sloping portion would indicate economies of scale while an upward sloping portion would indicate diseconomies of scale.
Long run Phillips Curve: Many economists believe that in the long run the actual unemployment rate will equal the natural rate of unemployment. In this case, the long run Phillips Curve is a vertical line at the natural rate of unemployment. This would indicate that no trade-off exists between inflation and unemployment in the long run.
Lowest cost firm: A form of price leadership in oligopoly in which the firm with the lowest costs is the price leader.
LRATC: Long run average total cost. In the long run, all costs are variable, and all short run situations are possible. The long run average total cost curve connects all possible short run average total cost curves. This can take different shapes, but a downward sloping portion would indicate economies of scale while an upward sloping portion would indicate diseconomies of scale.
Luxury good: A good with a high income elasticity of demand.
Macroeconomics: The study of economics at the level of the economy as a whole, or an entire industry or sector of the economy as a whole.
Marginal benefit: Additional benefit received as a result of the last choice made.
Marginal cost: The addition to total cost associated with the last unit of output.
Marginal physical product: The addition to total physical product when one more unit of a variable input is added.
Marginal propensity to consume: MPC. The percentage of additional disposable income spent instead of saved.
Marginal propensity to import: MPI. The percentage of additional disposable income spent on imported goods.
Marginal propensity to save: MPS. The percentage of additional disposable income saved instead of spent.
Marginal revenue: MR. The addition to total revenue resulting from one more unit of output sold. Marginal revenue product: MRP. The addition to total revenue resulting from one more unit of a variable input.
Marginal utility: The addition to total utility resulting from consuming one more unit of a specific good.
Market: A sector of the economy in which firms use similar resources to produce similar products. Often used interchangeably with the term industry.
Market demand curve: The demand curve for an entire market, as opposed to the demand curve for an individual firm or consumer. Equal to the sum of all individual demand curves.
Market economy: An economic system in which market forces are free to determine economic outcomes.
Market failure: A situation in which the free market does not allocate resources to their most efficient uses.
Market power: The ability of one firm to influence market prices.
Market share: The percentage of a market controlled by a specific firm.
Market structure: Refers to a classification economists use to describe firms with similar behavioral characteristics, based on the number of firms in an industry, the similarity of products, ease of entry into the market, and market power.
Market supply curve: The supply curve in an entire market, as opposed to the supply curve for one firm. Equal to the sum of all individual firms’ supply curves.
Marketable permits: Permits issued by the government to control the amount of negative externalities. MC: Marginal cost. The addition to total cost associated with the last unit of output. Medium of exchange: The function of money meaning that money serves as a means of payment.
Merchandise account: The part of the current account in the balance of payments that refers to the movement of merchandise between nations. Represents exports and imports.
Microeconomics: The study of economics on the individual level: The individual firm, the individual consumer, or the individual worker.
Midpoint formula: A method for calculating elasticity that eliminates the discrepancy created by naming one starting point as opposed to another starting point in the calculation. Minimum efficient scale: The lowest point on the long run average total cost curve. Minimum wage laws: Laws that set a price floor for wages.
Mixed economy: An economic system that has features of both a market economy and a command economy.
Model: An approach used in the study of economics that simplifies reality in order to focus attention on a specific relationship between variables.
Monetarists: Economic school of thought developed in the 1940s to oppose the theories of Keynesian Economics.
Monetary policy: Economic policy of the government or central bank relating to the money supply and interest rates.
Monetary policy tools: Tools used by the government or central bank in implementing monetary policy.
Money: Anything that is widely accepted as payment in exchange for goods and services. This definition can be somewhat arbitrary in real world situations, so economists have separated the definition into four different definitions: M-1, M-2, M-3, and L. Money is also defined by its functions: medium of exchange, unit of account, and store of value.
Money demand: In macroeconomics, the amount of money that people want to hold instead of investing in financial instruments. Divided into the transaction demand for money, the precautionary demand for money, and the speculative demand for money.
Money supply: The total amount of money in the economy. The money supply can be controlled by the government or central bank through monetary policy. Since this means the money supply is not based on market forces, the money supply curve is a vertical line.
Money supply targets: Intermediate goal of monetary policy aimed at a specific level of money in the economy.
Monopolistic competition: A market structure characterized by having many competing firms, each small compared to the overall size of the market, selling differentiated products, with easy entry into the market.
Money multiplier: Another name for the deposit expansion multiplier in banking. The maximum amount by which a single deposit in a bank can increase the money supply throughout the banking system. It is the reciprocal of the reserve requirement.
Monopolist: A firm in a monopoly market structure.
Monopoly: A market structure in which one firm supplies the entire market.
MPC: Marginal propensity to consume. The percentage of additional disposable income spent instead of saved.
MPI: Marginal propensity to import. The percentage of additional disposable income spent on imported goods.
MPP: Marginal physical product. The addition to total physical product that results from the addition of one more unit of a variable input.
MPS: Marginal propensity to save. The percentage of additional disposable income saved instead of spent.
MR: Marginal revenue. The addition to total revenue resulting from one more unit of output sold.
MR=MC: Marginal revenue equals marginal cost. The profit maximizing output level for all firms regardless of market structure. Only in perfect competition will this also be the profit maximizing price.
MRP: Marginal revenue product. The addition to total revenue resulting from the addition of one more unit of a variable input.
Multiplier effect: The idea that a change can have an overall effect larger than the initial change. For example, an increase in discretionary government spending can create income for others to spend, resulting in an increase in real GDP larger than the amount of the increase in government spending.