Answer to Question #236709 in Macroeconomics for Calista

Question

Illustrate and examine how the individual supply of labor curve demonstrates the way an individual divides his/her time between work and leisure.?

Can I please have a detailed answer.

Answer 1

Solution:

The individual labor supply curve marks out the number of hours individuals are willing and able to work at different wage rates. The basis of the individual labor supply curve is to show the trade-off of labor and leisure at any given wage rate.

As individual wages increase, this encourages them to supply more labor since work is more attractive than leisure. Therefore, the labor supply curve will tend to be upwardly sloping. Nonetheless, the labor supply curve for an individual cannot continue to slope upwards indefinitely. The labor supply curve will first slope upwards and then bend backward. When wages increase initially, the individual is more willing and able to work because they have low income and plenty of free time. As the wage rate increases, individuals will be inspired to work many more hours, and the hours supplied will, therefore, increase. Individuals are choosing to substitute leisure time with work. It reaches a point where the income effect starts to outweigh the substitution effect and the individual chooses not to substitute any more leisure time with work. With higher wages, individuals choose to work less and have more leisure. This is because at higher wages, the marginal benefit of higher wages becomes lower and when it goes below the marginal benefit of leisure, individuals will switch to more leisure and less labor as the price of leisure increases.

 

The individual labor supply curve is shown below by the backward bending individual labor supply curve:

From point A to B the substitution effect is stronger than the income effect. The worker substitutes leisure time with work time to earn more income. After Point B, the income effect is stronger and the worker chooses to have more leisure time and give up some working hours.