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microbook_3e-page67 - x The substitution effect of a higher...

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The Price of Leisure x The wage rate is the price – or opportunity cost – of the benefits of either unpaid work or leisure. x The decision to enter the workforce involves a trade-off between wages and the goods and services that wages will buy on the one hand, and the leisure and the value of non-market production on the other. Labor Supply Curve x Labor supply curve shows quantity of labor supplied at different wage rates. wage x Its shape depends on how households react to changes in the wage rate. qty of labor supplied Substitution Effect of a Wage Change
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Unformatted text preview: x The substitution effect of a higher wage means that the relative price of leisure is now higher. Given the law of demand, the household will buy less leisure. x When the substitution effect outweighs the income effect, the labor supply curve slopes upward. Income Effect a Wage Change x The income effect of higher wage means that households can now afford to buy more leisure. x When the income effect outweighs the substitution effect, labor supply curve bends backward. wage qty of labor supplied wage qty of labor supplied Page 67...
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