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Figure 2.7 The Consumer’s Labour Supply Decision  (b) Equilibrium of a Participant

Figure 2.7 The Consumer’s Labour Supply Decision  (b) Equilibrium of a Participant

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Jack and Jill attend the same University

Weekly allowance of $10

Market wage rate $10.00 per hour

Total hours for discretionary activities: 98

hours

Jack and Jill value their time differently



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Hours of Work For Participate

Increase in non-labour income results in a parallel

outward shift of the budget constraint

 Leisure, Normal good:

More leisure will be consumed resulting in less

work hours

 Leisure, Inferior good:

Less leisure will be consumed resulting in more

work hours

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Buy more leisure



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Buy less leisure



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Two effects:

1. Income effect

The worker has more income to buy more

goods including leisure (reduces work

hours)

2. Substitution effect

Individual may work more because the

returns are greater substituting away from

leisure

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Income ($)



W1T + YN



-W1



W0T + YN

-W0

E’



E1

E0

U1

U0

Net effect



Income effect

0

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l’



Substitution effect

l1 l0



Leisure (time)

(non-market activity)



T



34











The net effect depends on both substitution

effect and income effect.

If income effect dominates, hours of work

may decline.

For a non-participant an increase in wages

may leave the equilibrium unchanged or

induce the individual to participate.



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The net effect depends on

both substitution effect and

income effect.



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Increase in wages may

leave the equilibrium

unchanged or induce the

individual to participate.



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Figure 2.7 The Consumer’s Labour Supply Decision  (b) Equilibrium of a Participant

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