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1、Notes4:LaborMarketsandUnemploymentI.LaborSupplyandLaborDemandA)LaborSupplyBackgroundRecallfromTopic2,wediscussedthedifferencebetweentheincomeandsubstitutioneffect.Theincomeeffectsaysthataspeoplebecomericher,theywanttoworkless.Thesubstitutioneffectsaysthatasthepriceofagoodgoesuptoday(i.e.,lei
2、sure),thenyouwantlessofthatgoodandmoreofothergoods(inthiscase,lessleisureandmoreconsumption-howdoyougetmoreconsumption?-workmoretoearnmore).Inmicro,youprobablylearnedmodelswithtwogoods.Iamgoingtogothroughaquickexampleoftwogoodsandthenwewilltakeittothemacrolevel.Supposeyouonlywanttoconsumeapp
3、lesandbananas.Supposefurtherthatyoulikeconsumingthesegoods.Thinkaboutyourownconsumptiondecision.Ifthepriceofapplesincreases-youaregoingtoswitchtowardsbananas.Rememberfrommicro,wearegoingtoconsumeuntilthemarginalutilityof(apples)/priceof(apples)=marginalutilityof(bananas)/priceof(bananas).Or,
4、MU(apples)/P(apples)=MU(bananas)/P(bananas)Ifthepriceofapplesincreases,youneedthemarginalutilityofapplestoincreaseinorderforthisequalityhold.Howdoyougetthemarginalutilityofapplestoincrease?YouconsumeLESSapples(thisisthelawofdiminishingmarginalutility-themoreyouconsumeofagood,theLESSextrautil
5、ityyouget-thinkaboutit,the10thhamburgerisnotassatisfyingasthe1st.).Thisisthesubstitutioneffect.Asthepriceofapplesincrease,youaregoingtosubstituteawayfromapplestowardsbananas.But,asthepriceofapplesincrease,youspendmorefortheapplesyoubuy.Thatmeans,insomesense-youarerelativelypoorer.Youcouldnot
6、haveboughtthesamebundleofapplesandbananasasyoudidbeforethepricechangedatthesamecostafterthepricechange.Giventhatyouarepoorer(duetothepricechange),youwillbuylessofeverythingyoulike(applesandbananas).Thisistheincomeeffect.Asthepriceofapplesincrease,youwilldecreaseyourconsumptionofBOTHapplesand
7、bananas.Notice,asthepriceofapplesincrease,youwilldefinitelydecreaseyourconsumptionofapples(incomeandsubstitutioneffectbothsaythatyouwillconsumelessapples).However,yourchangeinyourconsumptioninbananasinresponsetoanincreaseinthepriceofapplesisambiguo
