Title Short Notes- Individual labour supply curve.pdf ✅

Short Notes Choice between work and leisure The choice between work and leisure refers to the decision-making process that individuals go through when deciding how much time to allocate to work and how much time to allocate to leisure. The decision is typically based on the individual's preferences and constraints, such as the wage rate, the cost of leisure, and the availability of work opportunities. At a basic level, the choice between work and leisure can be represented by an Income leisure trade-off line between income earned from work and the opportunity cost of leisure time. Backward-bending Supply Curve of labour The backward bending labor supply curve is a phenomenon that occurs when an increase in the wage rate initially leads to an increase in labor supply, but beyond a certain point, further increases in the wage rate cause a decrease in labor supply. This phenomenon is a result of the interplay between two effects: the income effect and the substitution effect. The income effect occurs when an increase in the wage rate increases the worker's income, which allows the worker to purchase more goods and leisure. As a result, the worker may choose to reduce the amount of work in favor of more leisure time. This leads to a decrease in labor supply as the wage rate increases. The substitution effect, on the other hand, occurs when an increase in the wage rate makes work relatively more attractive than leisure time. As a result, the worker may choose to increase the amount of work in order to earn more income. This leads to an increase in labor supply as the wage rate increases. Initially, at low wage rates the substitution effect dominates the income effect, leading to an upward-sloping labor supply curve. However, after a certain point, at a very high wage rate the income effect begins to dominate, leading to a backward bending labor supply curve.
From A to B the substitution effect is stronger than the income effect since the worker’s has low wages. The worker substitutes leisure time with work time to earn more income. Between Point B and C, the worker has high wages and the income effect is stronger and the worker chooses to have more leisure time and give up some working hours. In summary, the backward bending labor supply curve is a phenomenon that occurs when an increase in the wage rate initially leads to an increase in labor supply, but beyond a certain point, further increases in the wage rate cause a decrease in labor supply. This phenomenon is driven by the interplay between the income effect and the substitution effect, and has important implications for labor markets and public policy. Assumptions It is essential to understand that with the supply curve of labour, there must be assumptions set which takes the curve's inevitable backward bending form. The assumptions for the theory of labour supply are listed as follows: 1. Workers choose whether they will work, and how many hours they will work. The number of hours workers choose not to work, considered as leisure time. A WLow B C WHigh Wage rate
2. There are no contractual obligations to work a certain number of hours. This is important to understand because contractual obligations will involve the labour supply curve to be set, and not on the basis of time worked. 3. Workers are utility-maximising agents. 4. Work provides a disutility, which must be compensated for by paying wages. 5. Unpaid leisure time is a "normal" good. 6. The labour market is competitive, and both firms and workers are price-takers.