Supply of Labor in Perfect Competition - Video Tutorials & Practice Problems
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Supply of Labor in Perfect Competition
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Alright. So we've discussed the demand for labor. Now let's consider the supply of labor. So the supply of labor you're gonna see it's very similar to the supply for a good most of the time when we talk about it, especially when we think market wide. Okay, So when we talk about the supply of labor though, now we're thinking about individuals, remember it's the individuals that are supplying the labor to a firm. So what's the ideas here that go into it when we decide to work? So as an individual, when we decide to work, we give up our leisure time, right? We give up the time that we would spend not working. Okay. And when we talk about leisure in economics, it's gonna include everything that's not work itself. So this isn't just days you spend relaxing on the beach, this is time you spend exercising time you spend with your family, Time, you spend walking your dog, right? Everything you do that's not work. Well that's leisure. Okay. So you spend your you're essentially giving up that leisure time to work, right? Every hour that you're working is an hour. You don't spend having leisure time. Cool. So one more topic here is the reservation wage. So the reservation wage is the lowest wage someone is willing to take to work. So you could imagine that if the wages were low enough, you'd say you know what screw it, I'm not gonna work. I'll just figure out another way to do this. Okay, so there's gonna be some wage that's gonna be the lowest minimum that they would take to work. And then any wage above that they would work. Okay, So, what we're gonna see, especially on the market market supply, is that as wages increase, the supply of labor increases, right? And this makes sense, right? As you make more money, you're gonna wanna work more to make more money, right? That you're gonna be more willing to work at higher wages to make more money. All right, So, that's the idea here, is that as the wages go up, you are going to um supply more labor and we're gonna end up in a situation like we see here, okay, So this is gonna be the supply of labor. And we see it looks very similar to supply when we're studying product supply, right? It's just an upward sloping curve. Nothing crazy here, Right? When we have let's say this low wage right here, I'll put low wage wage low, Well, there's gonna be this quantity supply right here, right, quantity low. And then if the wage gets high up here, well, people are gonna be more willing to work and there will be a much more higher quantity of labor over here, right, quantity. Excuse me, quantity high, right, This is the high quantity. Uh Well, there's a high wage. Cool. And one last thing here, this bottom point, right here. Well, this is gonna be that reservation wage. We talked about right? Notice how it's not touching the very bottom because you would at least want this much money before you worked, right? So that would be the reservation wage. And here we're basically talking about the market supply. We're talking about supply on a grand scale. All right. So why don't we? In the next next video, let's break down the individual supply curve and see how it could actually have some interesting things happening in there. Alright, let's do that now.
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Individual Supply Curve of Labor (Backward-Bending Supply Curve)
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Alright, so now let's think about the supply curve on the individual level. Okay, so on the individual level, remember this is just you and me supplying our labor to the market, what we're gonna see is that it's actually possible and you got a little spoiler at the bottom, it's possible for the supply curve to bend backwards. Okay. It's gonna turn back around just like you see on that graph at the bottom. Okay, so let's think about how this could happen. So think about it as your wages increase as you're making more and more money per hour? The wages are increasing. Well, a person's gonna be earning more money, right? That's simple enough, person earns more money as the wage increases. But think about as you reach a high enough wage where you're making enough money per hour? Well you might start to value your leisure time more than work, right? You should you could be making enough money from the work you're doing that, you'd say, hey actually at this point maybe I value more leisure time than I do work because I'm already making a high enough salary, right? So once you reach a high enough wage, you might value that leisure more than the work. And this is where the substitution effect and income effects come into play. Alright, So the substitution effect, the first thing that happens when you reach a high wage, Well the increased wages, it's gonna raise the opportunity, cost of leisure time, right? Because now if you wanted to take an hour off, you're gonna have to give up that higher wage than when you were making less money. So now, once you're making a high wage, the opportunity cost goes up. Alright, So it makes it a little more difficult to want to not work because you're thinking, hey, I could be making $50 an hour, $100 an hour, you could be making some big amount of money um that you're giving up to have leisure time. But the other side of the coin is the income effect because increased wages, Well, it gives the consumer more purchasing power, right? When you have more money, you have more purchasing power, you have more money to purchase stuff. Okay? So let's follow this timeline, wages increase, right? And when we think about leisure, leisure is going to be a normal good? Remember we talked about normal goods and inferior goods? These had to do with the income level. When the consumer's income went up, they bought more normal goods and less inferior goods. So think about this. If leisure is a normal good, when you have more money, you want more leisure, right? You want you're gonna want more leisure as your as your income goes up. Well, the wages increase, leisure is a normal good. So the quantity demanded of leisure is gonna go up, we're gonna see an increase in the demand for leisure, right? And that's just how we saw when we studied supply and demand and normal goods. Okay, So think about that as the wages go up, you're gonna reach a point where the income effect outweighs the substitution effect. Okay, So there's gonna be levels of income. So let's go down here to the graph where the substitution effect is stronger than the income effect. That substitution effect all along here all the way up to this point, That substitution effect is having a stronger hold right where the wages going up and you are considering that opportunity cost. So you are going to spend more and more time at work because of those higher wages. Right? So once you reach this level, say that's $100 an hour, that was your your your breaking point right there. Now you're making $100 an hour, they start offering you more than that and you're like, man, I'm making a ton of money already, it'd be better if I spent some time, you know, buying a boat and sailing around the world, whatever it is, you're gonna want to spend that time on leisure instead. And that's what ends up happening. It starts going backwards again. Right? So we still have a reservation wage down here, the lowest we take and then, and then it's gonna keep increasing, right? The supply curve increases, just like we're used to up to a point and then once you reach that threshold, it's gonna turn back around because you're gonna supply less labor and take more leisure time. Right? So up here, this last part where it's turning back around, that's where the income effect is outweighing the substitution effect. You're at that point, you're valuing that leisure time more than you're valuing the uh extra time at work. Cool. So that's a pretty interesting thing. We haven't seen anything like this before where the curve actually bends back the other way. This is a very special case when we think of the tradeoff between leisure and work. Cool. Alright, so let's go ahead and move on to the next video.
