Answer to Question #125840 in Microeconomics for Faith

Question

Use a graph to illustrate and explain the individual supply of labour curve.in your answer describe the forces that determine the form(shape) of the individual supply of labour curve

Answer 1

This is what we call a backward bending supply curve (for obvious reasons!). Notice that the y-axis is labelled 'real wage'. It is important that we look at hours worked relative to the real wage. The whole point of the income effect is that the worker feels richer and so decides to 'buy' more leisure time and work fewer hours. If the wage rate rises, but at the same time the average price level rises too, then the worker will not feel any richer at all.

The section of the curve up to point A is upward sloping. This means that as the real wage rises, the individual works more hours each week. In this portion of the curve, the substitution effect is stronger than the income effect. This is to be expected. At lower real wage rates workers do not tend to feel so rich that they feel they can afford a day off each week! If anything, at lower wage rates, any rise in the real wage rate will encourage a individual to work more hours to earn even more money.

Above point A, the curve bends backwards. As the real wage rate rises, the individual decides to work fewer hours. After point A, the income effect begins to outweigh the substitution effect. In a sense, a target income has been reached, so if the real wage rises the individual can still earn his target income by working fewer hours. In fact, if you look at the diagram, at real wage W2, the individual works fewer hours than at real wage W1, but his overall weekly income is still higher (OW2BH2 > OW1AH1).