Work provides income that, in turn, can be used to purchase goods and services that generate utility. Leisure is a type of consumption good individuals gain utility directly from it. To simplify our analysis, let us assume that there are two ways in which an individual can spend his or her time: in work or in leisure. There are lots of uses to which we can put our time: we can raise children, work, sleep, play, or participate in volunteer efforts.
The supply of labor, of course, is the other.Įconomists think of the supply of labor as a problem in which individuals weigh the opportunity cost of various activities that can fill an available amount of time and choose how to allocate it. The demand for labor is one determinant of the equilibrium wage and equilibrium quantity of labor in a perfectly competitive market. Discuss the factors that can cause the supply curve for labor to shift.Explain the income and substitution effects of a wage change and how they affect the shape of the labor supply curve.
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