08.01.supply3

08.01.supply3 - BUEC280Lecture11 IndividualLabourSupply...

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  Prof. Simon D. Woodcock BUEC 280 Lecture 11 Individual Labour Supply  Continued
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  Prof. Simon D. Woodcock Last day Defined budget constraint Defined optimal allocation of leisure  and consumption Changes in non-labour income  generate a pure income effect Change in wage rate generates both  income and substitution effects Don’t know which dominates Today Isolating income and substitution  effects Tracing out the individual labour  supply curve Reservation wages
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  Prof. Simon D. Woodcock Isolating Income and  Substitution Effects Wage changes generate both income and  substitution effects Income effect: Δ in hours worked due to Δ  in income, holding wages (price of leisure)  and preferences constant W      income    consume more leisure  because it’s a normal good Substitution effect: Δ in hours worked due  to change in W (price of leisure), holding  income and preferences constant W     price of leisure    consume less  leisure Theory doesn’t tell us which one dominates When W , H (and L=T-H) can rise or fall Can we isolate these effects graphically?
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Prof. Simon D. Woodcock A wage increase where the substitution effect dominates The observed change (total effect of wage change from W 1 to W 2 ) The income effect (response to change in income, holding W and preferences
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This note was uploaded on 10/12/2009 for the course BUEC 280 taught by Professor Simonwoodcock during the Spring '07 term at Simon Fraser.

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08.01.supply3 - BUEC280Lecture11 IndividualLabourSupply...

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