Labor Market: Productivity, Output, and Consumption
Supply for Labor
Individual / Household's decision
Aggregate supply of labor is the sum of individuals labor supply
Labor supply depends on labor-leisure choice
Cost: Loss of leisure time
Benefit: More consumption, since labor income is higher
How labor supply responds to real wage changes
Substitution effect: Higher real wages encourages work, since reward for working is higher, so will supply more labor
Income effect: Higher real wage increases income for same amount of work time, so person can afford more leisure, so will supply less labor
Labor Supply Curve
Relates quantity of labor supplied to real wage
Slopes upward since higher wage encourages people to work more
Aggregate labor supply rises when current real wages rise since some people work more hours, others enter the labor force
Factors that shift the Aggregate Labor Supply Curve
Wealth, expected future real wage, working-age population, and participation rate
Production Function
Factors of production
Capital Stock, labor, raw materials, energy, land, technology
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