Monday

 

Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.

PART 7 Topics for Further Study
Chapter 21 of 36 The Theory of Consumer Choice
Section 21 of 26
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Sally's decision between leisure and consumption determines her supply of labor.
This is because the more leisure time she takes the less time she has left to work to make more money to pay for more consumption.
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In panels (a) and (b) the right graph shows the labor-supply curve resulting from Sally's decision.
In panel (a) a higher wage
· induces Sally to work more and enjoy less leisure
· the labor-supply curve slopes upward
In panel (b), a higher wage
· induces Sally to enjoy more leisure and work less
· the labor-supply curve slopes downward
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At first, the backward-sloping labor-supply curve may seem puzzling
Why would a person respond to a higher wage by working less?
The answer comes from considering the income and substitution effects of a higher wage.
The substitution effect
When Sally's wage rises leisure becomes more costly relative to consumption.
This encourages Sally to substitute away from leisure and toward more work , which allows her more consumption.
The substitution effect induces Sally to work more hours in response to higher wages.
Which makes the labor-supply curve slope upward, which is what we would expect.
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The income effect
When Sally's wage rises she moves to a higher indifference curve and she is now better off than she was before.
As long as consumption and leisure are both normal goods she tends to want to use this increase in well-being to enjoy both higher consumption and greater leisure.
In panel (b)
Consumption (hours of work) is an inferior good.
Which makes the labor-supply curve slope backward.
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It’s a situation we all face, work/study more or relax/hobbies more.
With a higher wage Sally can continue her current amount of consumption working fewer hours creating more leisure time.
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a situation we all face
mina chokumen suru jōkyō
皆直面する状況