Ch. 6- Personnal Flashcards
Opportunity cost of leisure
- Cost of spending time not working
- Equal to the wage rate
Subsititiution effect of labour
People will want to work morebecause cost of leisure increase
If wage rates increase, demand for leisure increases
Income effect of labour
People will want to work less because income increases
IF income increases and waged and preferences stay the same
What happens when wages increase ( if high, if low before)
- High: the income effect is stronger, supply curve bends backward
- Low: Substitiution effect is stronger, supply curce slopes upwards
Preference for leisure
Utility that one gains from leisure and income
Shown on indifference curves
Indifference curve
Curve showing a combination of Leisure and Income that would yeal the same utility
Steep indifference curves
High value placed on leisure
Flat indifference curve
Low value placed on leisure
Slope of indifference curve
Marginal rate of subsititution : MRS y,l
How much income an individual is willing to give up in exchange for one additional unit of leisure
Budget Constraint
Line showing our constraints of a combination of leisure and income (given rate)
Slope= wage
Formula for wage
ΔIncome
ΔHours of Work
What does it mean when MRS is higher than w
The person values leisure more than the wage
Will choose not to work or work less
What does it mean when MRS is smaller than w
the person values wage more than leisure and
will choose to work more
What does it mean when MRS is equal to w
the person is at their maximizing point
