Answer to Question #242972 in Macroeconomics for Ayanda

Question

Illustrate and examine how the individual supply of labour curve demonstrates the way an individual divides his/her time work and leisure

Answer 1

The individual supply of labor curve indicates the number of hours that laborers are willing and able to work at distinct wage rates. This curve shows the trade off between labor and leisure at any given wage rate. Individuals make a choice between labor and leisure. When individual wage rate rise, they will have to supply more labor and cut down on their leisure time. The labor supply curve will slope downwards.

The labor supply curve however does not slope upwards indefinitely. There reaches a point where it bends backwards. At initial rise in wages, an individual is able and willing to work because they have lower income and plenty of free time.

As wage rate increases, individuals are encouraged to work for many more hours. The labor hours supplied are thus increased. Individuals substitute leisure time for work.

However, it reaches a point where the income effect overcomes the substitution effect and the individual chooses not to substitute any more leisure time with work. At more higher wages, individuals choose to have more leisure and work less.

This is because marginal benefit of higher wages is decreased at higher wage rates and it becomes less than the marginal benefit of leisure.