lecture3 - 4 Note concept of non ‐ market activities...

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AP/ECON3240A Lecture 3 on September 15, 2011 Prof. Xueda Song A. Review 1. In last class we examined how key dimensions of labour force activity are defined and measured: labour force, LF participation, employment, unemployment, out of the labour force. 2. One of the most important decisions made by an individual is how to allocate time between market and non-market activities. 3. Then we discuss models economists use to understand and explain these phenomenon. Basic tool is the “income – leisure choice model.” B. Income – leisure choice model 1. Model is an application of basic consumer theory to choice between work and non work activity. 2. In consumer theory, the individual chooses the bundle of goods and services that yields the highest utility given the prices of the goods and the individual’s income. 3. In the income – leisure choice model the individual chooses how much time to allocate to paid work and how much time to allocate to nonmarket activities (or “leisure”).
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Unformatted text preview: 4. Note concept of non ‐ market activities includes household production (cooking meals, raising children, etc), sleeping as well as pure leisure. 5. We will model the decision between 2 goods, leisure (l) and income (Y)/consumption. 6. Indifference Curves (Preferences) All the combinations of income and leisure that yield the same total utility. 7. Income Constraint (Budget Constraint) All the combinations of leisure and income that are attainable by the household given income and prices (wage). 8. Utility Maximizing Combination of Income and Leisure The individual will try to maximize her utility subject to the income constraint. Put together the individual’s indifference curves map and income constraint to obtain the optimal choice. 9. Comparative Statics To analyze the effects of changes in key features of economic environment (including non-labour income and wage) on individual’s labour supply decision. 10. Individual Supply Curve...
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