W4P2 - Notebook LM Flashcards
How do households make decisions about labour supply, according to the lecture?
Households decide between consumption and leisure, using indifference curves to represent preferences. They aim to maximize utility within their budget constraint.
What do indifference curves represent in the context of labour supply?
Indifference curves show combinations of consumption and leisure that provide the same level of utility to a household. The slope of the indifference curve represents the marginal rate of substitution between consumption and leisure.
What is the budget constraint in the labour market model?
The budget constraint shows the feasible combinations of consumption and leisure a household can afford. Its slope is determined by the negative wage rate.
How is the optimal level of consumption and leisure determined in this model?
The optimal level is where the indifference curve is tangent to the budget constraint, meaning the marginal rate of substitution is equal to the wage rate.
What are the income and substitution effects of a wage increase?
The income effect may lead to working less due to increased income, while the substitution effect may lead to working more due to the higher value of work relative to leisure.
Which effect (income or substitution) typically dominates in the labour market, and what does this imply for the labour supply curve?
The substitution effect typically dominates, resulting in an upward-sloping labour supply curve.
What is a backward-bending labour supply curve?
A backward-bending labour supply curve could occur at very high wage levels, where the income effect outweighs the substitution effect and leads to reduced labour supply.
How is labour demand derived in this model?
Labour demand is derived from a firm’s production function, which shows the relationship between labour and output. Firms aim to maximize profits by hiring labour up to the point where the marginal product of labour equals the wage rate.
What is the marginal product of labour (MPL)?
The MPL is the additional output produced by one more unit of labour. It is the slope of the production function. The MPL declines as more labour is added, assuming a concave production function.
How do changes in wages affect labour demand?
A decrease in wages leads firms to hire more workers.
How does an increase in productivity affect labour demand?
An increase in productivity shifts the labour demand curve to the right, meaning firms will hire more workers at any given wage level.
How is equilibrium determined in the labour market?
Equilibrium is where the labour supply and labour demand curves intersect, determining the equilibrium wage and level of employment.
What is voluntary unemployment in this model?
Voluntary unemployment is the gap between the equilibrium level of employment and the total labour force.
What is the real wage?
The real wage is the wage rate divided by the price level.
How can long-run UK data on wages and hours worked be interpreted?
The data shows an increase in real wages with a decrease in average hours worked. This can be interpreted as a leftward shift in the labour supply curve and a potential slight rightward shift in labour demand.
