Introduction

After you have worked through this section of the learning unit, you should be able to:

  • explain the difference between the income and substitution effect of a change in wages
  • explain why a positive relationship exists between wages and the quantity of labour supplied
  • derive the market supply for labour

It is now time to consider the supply of labour, and in this section you will see it is quite different from the supply of a product. The supply of a product originates from the firm while the supply of labour is a function of the decision made by households. Let's see what  the factors are that influence the decision by households to supply labour.

Which of the following factors do you think a household will take into account when deciding whether to supply labour to the market or not?

  • The wage that will be earned
  • The goods and services that can be purchased with the wage earned
  • The leisure time that must be sacrificed
  • The number of hours that a person must work
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All of them are important as we will shortly explain.