Labour Supply Flashcards
How is a workers time split? (equation)
What is labour income? (equation)
and
What is non-labour income?
Write the equation for utility for a worker
Y = Total Income
N = Non Working Hours
State the worker’s time constraint
What is the equation for the total income of a worker?
What is the trade-off with this labour supply model?
(Y = wH + Y*)
(T = H + N) etc…
Individuals are trading off leisure and consumption in this model, if they work all the time they can buy lots of goods but get no leisure time, vice versa.
The consumers’ preferences are important as what they do depends on how much utility they gain from leisure time versus how much utility they gain from consumption.
Draw a graph showing the workers time, good per day, indifference curves, the budget and the time constraint.
The x axis measures both “leisure hours per day” and “work hours per day”.
Moving left increases working hours, moving right increases leisure hours.
How do you derive a leisure demand curve from a labour supply graph?
Since the cost of leisure time is working hours we can make the demand for leisure into a demand curve by putting wage per hour on the y-axis.
How do you derive the labour supply curve?
The mirror of the leisure demand curve is the supply of work hours
Eg, at e1 if the person is consuming 16 hours of leisure, they must be working 8 hours a day.
This helps show how people change their working hours depending on their wage.
Use calculus to derive the supply of work hours
Break down an increase in wage into substitution and income effects
In this instance, a wage increase causes the leisure time to increase and work time to decrease.
As the wage increases, the relative price of leisure increases and the slope of the budget constraint increases. The substitution effect is to move from e1 to e* , using a different budget constraint L*, this is not a budget increase, the area beneath it is the same as L1 , it is just different; we also use the same indifference curve.
The income effect can be shown with a new budget constraint, this allows the consumer to reach a higher indifference curve and so the effect is to move from e* to e2 .
The income effect comes from the fact that for every extra hour the worker works, they earn more money, therefore there is a pure income effect. (whereas the substitution effect is about just feeling more wealthy).
Is leisure a normal or inferior good?
Leisure can be an inferior good or a normal good depending on the indifference curves
