19.5 Summary

Things you should know

• The labor supply model is an endowment model in which good 1 is leisure ($R$, measured in hours), good 2 is consumption ($C$, measured in dollars for), and the price ratio is the wage rate $w$.
• The endowment is $\overline R$ hours of leisure (usually 24) and $M$ dollars of nonwage income. This implies that the equation for budget line is: \(wR + C = w \overline R + M\)
• Labor supply curve: plots $L^*(w)$ in a diagram with $L$ on the horizontal axis and $w$ on the vertical axis; note that $L$ is the net supply of good 1, so this is just a net supply curve.
• Alternative framing that we didn’t get into: if consumption is measured in a “composite good” with a price level $p$, the slope of the budget line represents the real wage $w/p$ rather than the nominal wage $w$.

Things you should be able to do

• Represent an employment offer in leisure-consumption space
• Determine the equation for a budget line with a wage
• For any utility function, determine the optimal labor supply choice for any wage rate $w$ and nonwage income $M$
• Extend the model beyond the simple case, to include situations like overtime pay or “take it or leave it” employment contracts