Learning by doing (1962)

Learning-by-doing refers to the hypothesis that labor learns through experience in the production process, thereby allowing economies of scale in future output. The increase in productivity diminishes over time. The first theoretical model of this kind was constructed by American economist Kenneth Arrow (1921- ), but many empirical studies had been carried out in the early

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Least cost location theory (1826)

Part of general location theory, pioneered by Prussian landlord Johann von Thunen (1783-1850) and later by German economist and sociologist ALFRED WEBER (1868-1958); least cost location theory posits that agriculture and industry locate their activities as close to their markets as possible, thereby achieving the least cost of transport for the goods they produce. Von Thunen’s

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Le Chatelier principle (1947)

Named after French chemist Henry Le Chatelier (1850-1936) by American economist Paul Samuelson (1915- ), Le Chatelier principle deals with constraints on maximizing behavior, explaining that short-run demands have lower elasticity than those in the long run since a longer time frame allows new factors and prices to change. (Le Chatelier had earlier formulated a reaction

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Leontief paradox (1953)

Russian-born economist Wassily Leontief (1906-1999) devised this contradiction of the Heckscher-Ohlin trade theory. Trade is determined by the relative abundance of factors of production in each economy. Leontief discovered that despite the USA being endowed with an abundance of capital, its exports were labor intensive and imports capital intensive. Also see: factor-price equalization theorem, rybczynski theorem Source: W W Leontief, ‘Domestic

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Life-cycle hypothesis (1957)

Comprising the analysis of individual consumption patterns, life cycle hypothesis was developed by American economist Irving Fisher (1867-1947) and English economist Roy Harrod (1900-1978), before later being extended by Japanese economist ALBERT ANDO (1929-2001) and Italian-born economist Franco Modigliani (1918-2003). Life-cycle hypothesis assumes that individuals consume a constant percentage of the present value of their life income. This is dictated

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Lindahl equilibrium (1919)

Named after Swedish economist Erik Lindahl (1891-1960), Lindahl equilibrium theorizes that the provision of public goods reaches an equilibrium when everyone agrees on the level of goods to be provided, and their prices. Thus, a set of Lindahl prices comprises individual shares of the collective tax burden of an economy. The sum of Lindahl prices is equal to the cost

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Linear programming (1947)

First used by American mathematician GEORGE BERNARD DANTZIG (1914- ), and widely adopted in logistical planning and the optimization of economic development planning; linear programming is a mathematical technique for determining a range of maximum values at minimum cost while dealing with known constraints. A car-maker would try to program the optimum production of

Loanable funds theory of the rate of interest (19TH CENTURY- )

Developed by Swedish economist Knut Wicksell (1851-1926), loanable funds theory of the rate of interest posits that interest rates are determined by the supply and demand of loanable funds in the capital markets. Loanable funds theory of the rate of interest suggests that investments and savings determine the long-term level of interest rates, whereas short-term rates

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Lump of labor theory of wages

In the short term, the demand for labor is fixed and employment can be created only by job-sharing and reducing existing working hours of workers. Lump of labor theory of wages ignores the role of macroeconomic policy in stimulating the economy. Source: M Allais and O Hagen, eds, Expected Utility Hypotheses and the Allais

Lyapunov’s theorem (1940)

Named after Russian mathematician A A LYAPUNOV, Lyapunov’s theorem asserts that the range of a non-atomic totally finite vector-valued measure is both convex and compact. Source: A A Lyapunov, ‘On Completely Additive Vector-Functions’, Izvestia Akademii Nauk SSSR, vol. IV (1940), 465-78 Lyapunov theorem may refer to: A theorem related to Lyapunov stability – the stability of solutions

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Machinery question (1695)

English merchant and writer John Cary (d.c.1720) first dealt with the impact of the introduction of machinery on employment, an issue later examined by classical economists such as the English economist David Ricardo (1772-1823). Ricardo saw increased mechanization as reducing the wages fund, although the English philosopher John Stuart Mill (1806-1873) argued that any fall in wages would be

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Malthusian population theory (1798)

Named after English economist the Reverend THOMAS ROBERT MALTHUS (1766-1834), who believed that population would increase at a geometric rate and the food supply at an arithmetic rate. This disharmony would lead to widespread poverty and starvation which would only be checked by natural occurrences such as disease, high infant mortality, famine, war or

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Managerial theories of the firm (1960S)

A range of theories suggesting that managements in large oligopolistic organizations have supplanted the traditional goal of profit maximization. (New goals may, for example, focus on sales or asset growth maximization.) Managerial theories of the firm also recognize that power within the organization has shifted away from shareholders to management. Also see: theory of the

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Marginal cost pricing

Marginal cost pricing is the pricing of a product so that it covers the cost of producing one extra unit of the product. Marginal cost pricing method is frequently used in public services and utilities where the aim is to maximize the economic welfare of the state. In reality, deficits can arise for a

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Marginal efficiency of capital (1936)

Developed by English economist John Maynard Keynes (1883-1946), marginal efficiency of capital describes the rate of discount which would make the present value of expected income from fixed capital assets equal to the present supply price of the asset. As investment increases, the rate of returns decreases because early investment was directed at the most lucrative

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Marginal productivity of distribution (1899)

First formulated by American economist John Bates Clark (1847-1938), marginal productivity theory of distribution shows how capital or labor will be sought until the marginal revenue from employing either is equal to its marginal cost. Marginal productivity theory of distribution deals principally with demand for factors of production and disregards the supply side. Also see: Euler’s theory, returns

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Marginal utility theory (1870S)

Proposed in the late 19th century by the Marginalist group of economists, who used differential calculus to study the impact of small changes in economic quantities, marginal utility refers to the additional satisfaction a consumer derives from the consumption of one extra unit of a product. Thus, an individual’s demand for a product is

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Mark-up pricing (20TH CENTURY)

Developed by Polish economist Michal Kalecki (1899-1970), mark-up pricing is an aspect of average cost pricing in which firms calculate the average cost of a product and add on a mark-up, or profit. Research conducted in 1939 showed that the mark-up often remains constant irrespective of supply and demand conditions. Mark-up pricing is considered an alternative to marginal cost

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Marshall-Lerner principle (1944)

Named after English political economist Alfred Marshall (1842-1924) and Romanian-born economist Abba Lerner (1905-1982), Marshall-Lerner principle states the conditions under which a change in a country’s exchange rate will improve its balance of payments. In its simplest form, Marshall-Lerner principle states that the price elasticity of demand for imports and exports must be greater than unity for improvements

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Market penetration strategy

Market penetration strategy refers to the successful selling of a product or service in a specific market. It is measured by the amount of sales volume of an existing good or service compared to the total target market for that product or service. Market penetration is the key for a business growth strategy stemming from the Ansoff Matrix. H. Igor

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