6/8/2023 0 Comments Importance of labour supply![]() With wage line AW 1, the individual is in equilibrium at point Q on indifference curve I 1 and is working AL 1 hours in a week. 33.1(a) To begin with, the wage line is AW 1 the slope of the wage line indicates the wage rate per hour. The changes in the work-effort or labour supplied by an individual worker due to the changes in the wage rate is illustrated in Fig. Thus, whether an individual will supply more work- effort or less as a result of the rise in the wage rate depends upon the relative strengths of the income and substitution effects. In what follows we shall explain how we derive a supply curve of labour of an individual and of the economy as a whole in all these circumstances. However, beyond a certain higher real wage and number of hours worked, leisure becomes more desirable and income effect outweighs substitution effect, and as a result supply of labour decreases beyond a certain higher wage rate. ![]() The economists generally believe that substitution effect of a rise in real wage is larger than its income effect and therefore individuals work for more hours (that is, supply more labour) at a higher wage rate. ![]() This is called income effect of the rise in wage rate which tends to increase leisure and reduce number of work hours (i.e. This increase in income tends to make the individual to consume more of all commodities including leisure. But the increase in the real wage rate also makes the individual richer, that is, his income increases.
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