Chapter 12 Outline - Chapter12Outline 15:43 121LaborSupply...

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Chapter 12 Outline 15:43 Labor Markets and Labor Unions 12-1 Labor Supply A. Labor Supply and Utility Maximization o Two sources of utility Consumption of goods Services and the enjoyment of leisure You can use time in three ways Market work—selling your time in the labor market Nonmarket work—using time to produce your own goods and services Leisure—using your time in non-work pursuits Increasing marginal disutility—the more you work, the greater the marginal disutility  of working another hour Net utility of work—the utility of the additional consumption possibilities from  earnings minus the disutility of the work itself As a rational consumer, you attempt to maximize utility by allocation your time so that  the expected marginal utility of the last unit of time spent in each activity is identical B. Wages and Individual Labor Supply o A higher wage has two effects on your use of time First, because each hour of work now buys more goods and  services, a higher wage increases the opportunity cost of  leisure and nonmarket work Thus, as the wage increases, you substitute market  work for other activities This is the substitution effect of a wage increase Second, a higher wage means a higher income for a given number of hours This higher income increases your demandfor all normal goods The income effect of a wage increase tends to reduce the quantity of labor supplied  to market work. As your wage increases, the substitution effect causes you to work more, but the  income effect causes you to work less and demand more leisure The backward-bending supply curve gets its shape if the income effect of a higher  wage eventually dominates the substitution effect, reducing the quantity of labor  supplied as the wage increases.
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C. Nonwage Determinants of Labor Supply o Other sources of income
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