demand for leisure The more leisure people demand, the less labor they supply Two aspects of the demand for leisure play a key role in understanding the supply of labor First, leisure is a normal good All other things unchanged, an increase in income will increase the demand for leisure Second, the opportunity cost or “price” of leisure is the wage an individual can earn A worker who can earn $10 per hour gives up $10 in income by consuming an extra hour of leisure The $10 wage is thus the price of an hour of leisure A worker who can earn $20 an hour faces a higher price of leisure Income and Substitution Effects Suppose wages rise The higher wage increases the price of leisure We saw in the chapter on consumer choice that consumers substitute more of other goods for a good whose price has risen The substitution effect of a higher wage causes the consumer to substitute labor for leisure To put it another way, the higher wage induces the individual to supply a greater quantity of labor We can see the logic of this substitution effect in terms of the marginal decision rule Suppose an individual is considering a choice between extra leisure and the additional income from more work Let MULe denote the marginal utility of an extra hour of leisure What is the price of an extra hour of leisure? It is the wage W that the individual forgoes by not working for an hour The extra utility of $1 worth of leisure is thus given by MULe/W Suppose, for example, that the marginal utility of an extra hour of leisure is 20 and the wage is $10 per hour Then MULe/W equals 20/10, or That means that the individual gains units of utility by spending an additional Attributed to Libby Rittenberg and Timothy Tregarthen Saylor URL: http://www.saylor.org/books/ Saylor.org 642