Lecture Notes 7

Lecture Notes 7 - 14/02/01 Upward sloping labor supply...

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14/02/01 Upward sloping labor supply curve (A) o The higher the wages someone is willing to pay you, the more willing you are to work Downward sloping labor supply curve (B) In a one day model, maximum about of leisure or work is 24 o Leisure by consumption graph o (24-L)*Wage rate = consumption ability = budget line o What is the opportunity cost of leisure? Wage rate o Need to know about preferences – indifference curve o Leisure and consumption – given your preferences as indicated by indifference curves a laborer will chose how many hours to take off What happens if there is an increase in the wage rate? o The price of leisure has risen – opportunity cost of leisure has risen o Higher indifference curve – working less, consuming more – budget curve shifts out, greater opportunities o Income effect and substitution effect Income effect makes a laborer richer –work less, consume more, as long as it is true that leisure is a normal good Substitution effect – leisure is more expensive, work more, earn more Income effect overrides substitution effect to shape behavior of laborers (A) – When the wage rate goes up, supply curve is upward sloping as suggested by the substitution effect (B) – If the income effect is very strong, the labor supply curve would be downward sloping (substitution effect > income effect)
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Lecture Notes 7 - 14/02/01 Upward sloping labor supply...

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