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Labor Supply

choice of labor - dependent on utility of leisure and money  

  • leisure competes w/ income for utility
    • wage rate measures price/value of leisure
  • u(L,Y)
    • L = hours of leisure
    • Y = income = wh
    • w = wage
    • h = hours worked
    • L+h = 24
  • uL / uY = w at maximum utility

income/substitution  

  • higher wages >> workers replace hours worked w/ leisure
    • substitution effect
    • work hours and leisure shift to satisfy initial utility
  • higher wages >> workers can purchase more goods
    • income effect
    • work hours and leisure shift to obtain highest possible utility
  • income effect exceeds substitution effect >> backward bending supply curve

*examples to come*     monopsony power - only 1 firm to buy up labor (ie. gov't, NASA)  

  • marginal value (MV) = marginal expenditure (ME)
  • monopsonist pays same price for each unit >> average expenditure = supply
Subject: 
Economics
Subject X2: 
Economics

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