6. Labour Markets - Labour Supply (Individual) Flashcards
What is the key choice individuals make in regards to the supply of their labour?
Individuals must choose between work and leisure - one is the opportunity cost of the other
What two key principles determine the shape of the individual supply curve of labour?
The Income Effect & The Substitute Effect
How can the income effect shape the supply curve for labour?
The income effect can be positive or negative - as wages rise one may choose to supply more of there labour in order to make more money - positive - or (if we have a target income) a rise in income may result in a reduction of supply of labour as people choose to work less - but earn the same amount
How can the substitution effect shape the supply curve for labour?
The substitution effect is always positive - it says that as wages rise the opportunity cost of leisure time increases providing more of an incentive to work
What is the shape of an individual’s supply curve and what goes on each axis?
An individual’s supply curve is backward bending ( rotated U shape) and on the y axis there is real wage while on the y axis there is hours worked
How does the income effect effect the supply curve in different stages?
In the first stage - low wages - there is a positive income effect as people need to work to earn a minimum amount off which they can liveIn the second stage - the rate at which people are working more to make more money is decreasing - people are beginning to reach there target incomes - however at this point they continue to work more hours because the income effect doesn’t quite exceed the substitution effectIn the final stage - people reach target incomes and the income effect becomes negative - people begin to stop working as leisure time becomes more valuable
How does the substitution effect effect the supply curve in different stages?
The substitution effect is always positive - always incentivises working
