How it is possible for a labour supply curve to bend backward, and the implication for the likely impacts of an income tax

The concept of marginal utility has been a valuable way to understand the fundamental law of downward-sloping demand. Nevertheless, over last few decade economists have developed an approach to analysis of demand, one that makes no mention of marginal utility. This approach makes use of the device known as indifference curves. This approach separates the income effect and substitution of a price change.

This essay is discussing further on the subject of the income effect and substitution effect of a change of price. Here, the definition of both approaches are explained clearly, the main features of both are summarised and see that it leads consistently to the desired result, and the distinction between both of them is explored as well. By looking at those explanations about the income and substitution effect, we can see why the quantity demanded of a good declines as its price rises.

Moreover, based on the explanations above, this essay also gives out the discussion concerning the relationship between the substitution effect and the inco

As wage rate increased, work hours decreased. The hourly wage rate is the opportunity cost of leisure. So a higher wage rate means a higher opportunity cost of leisure. It leads to a decrease in leisure and an increase in work hours. But instead, we have cut our work hours, because our incomes have increased. As the wage rate increases, incomes increase, so people demand in more of all normal goods. In this case, leisure is a normal good, thus people will demand more leisure.

LABOUR SUPPLY CURVE AND ITS LINK WITH INCOME AND SUBSTITUTION EFFECT OF A PRICE CHANGE

INCOME AND SUBSTITUTION EFFECT OF A PRICE CHANGE

Labour supply can be analysed by using the same ideas with the substitution and income effect of a price change. Take the leisure as the product and the wage rate as the cost paid for an hour of leisure. If the wage rate is $5 per hour, any hour spent at leisure is bought at the opportunity cost price of $5. if the wage rate is $6 per hour, an hour of leisure is bought for $6. Thus, leisure is more expensive, and the individual prefers to buy less leisure, that is, substitute more working hours. The substitution effect leads to an upward sloping labour supply curve with more hours of labour offered at higher wage rates. Work is substituted for the relatively more costly leisure.

Some topics in this essay:
CHANGE Labour, TAX CUT, PRICE CHANGE, OA OB, Microeconomic Analysis, Substitution Effect, Based Figure, CONCLUSION According, income effect, substitution effect, labour supply, OY OY’, wage rate, price change, effect dominates, real income, supply curve, effect price, income tax, labour supply curve, effect price change, wage rate increases, effect labour supply, opportunity cost leisure, SUBSTITUTION EFFECT,