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Lua functions are closures — they capture surrounding local variables (called upvalues).

function counter()
    local count = 0
    return function()
        count = count + 1
        return count
end
end

local c = counter()
print(c())   -- 1
print(c())   -- 2
print(c())   -- 3

Each call to counter() creates a fresh count upvalue. The returned function holds a reference to it.

Closures are how you build iterators, callbacks, partial application, and module-private state in Lua. Almost all of Lua's expressive power comes from this single feature.