Labor Suppl2 - leisure and consumption If a person decides...

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Labor Supply The labor market is an inversion of the goods and services market: in the labor market, individual buyers from the goods and services market become the suppliers of labor, while the firms that sold goods in the goods and services market become the buyers. Firms need workers to produce and sell goods, and so after they have decided how many workers and how many hours of labor they want (a process which we will examine in the labor demand unit ), they enter the labor market and "buy" labor. Workers enter the labor market with an idea of how much they want to work and how much they want to be paid, and they "supply" the labor. The combination of the two, labor supply and labor demand, determines how the labor market behaves. Let's take a look at labor supply. Workers, when deciding whether or not they want to work, and how much they want to work, are faced with a choice between two possibilities: leisure and consumption. (Economists assume that leisure can be treated as a normal good: more is better) There is a tradeoff, however, between
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Unformatted text preview: leisure and consumption). If a person decides that they want leisure, then they will work less (or not at all), but this means that they won't be able to buy as many things. If they decide that they want to consume, then they will work more (or all of the time), but this means that they won't have as much free time to themselves. Their preferences for leisure (free time) and all other goods (consumption), combined with the current market wage, will determine what combination of leisure and all other goods they will choose, much in the same way that an individual's indifference curves and the market price of different goods will determine what combination of goods that individual will buy. Even though workers are the suppliers of labor, they make their working decisions in a manner similar to the way they make their buying decisions: based on preferences and price....
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