Labor Supply

Trade-off between Real Income and Leisure

Labor supply is done by House-holds. House-holds wish to maximize their utility¹ and utility depends positively on real income and Leisure. Hence, there is a trade-off between the two.

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$U_1$, $U_2$ and $U_3$ are the indifference curves. Combination of income and leisure which gives equal satisfaction. Higher the level of IC, higher the satisfaction. Thus

$$U_3>U_2>U_1$$

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• As real wage increases, the labor supply $L^S$ also increases thus there is a positive relation $L^S⟺W/P$ .
• We also infer or derive backward bounding supply curve in the classical framework. $$L^S=g(W/P_{+})$$

Equilibrium output and Employment

$$\begin{array}{rlrl}Y& =Y(\overline{K},L)& \to & \text{Aggregate Production Function}\\ L^d& =f(W/P_{-})& \to & \text{Labour Demand}\\ L^s& =g(W/P_{+})& \to & \text{Labor Supply}\\ & & & \\ L^d& =L^S=L& & \end{array}$$

Real wage equilibriates the market.

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Footnotes

1. technical way to represent satisfaction ↩