AP Economics – 12/13/18

I.  Bellwork

• Page 704 MC 1-5
• Pg 704 FRQ #2

II.  Objectives:

• Describe how a worker’s decision about time preference gives rise to labor supply
• Determine the equilibrium wage and level of employment in the labor market

III.Discussion

The Supply of Labor

A.  Work versus Leisure –

B.  Wages and Labor Supply

1. Substitution Effect vs. Income Effect

a. Substitution effect – as wages (opportunity cost) increase people will choose work over leisure

b. Income effect – As people make more money and become better off financially, they want to consume more leisure. (Leisure is a normal good and demand increases with income).

Figure 71.1 Individual Labor Supply Curve (Backward bending Labor Supply Curve)

At lower wage rates  the substitution effect is strong (dominant)  and at higher wage rates the income effect is strong (dominant effect)

C.  Shifts of the Labor Supply Curve

• Changes in Preference and Social Norms (Ex: More women working)
• Changes in Population
• Changes in Opportunities (new labor markets opening/old labor markets closing
• Changes in wealth (not change in wages)

IV.  Classwork

71.1 & 71.2 on iLearn

AP Economics