Question

On which of the two factors the supply of labour is depended?

Answer 1

Two factors the supply of labour is depended are:

a) Substitution effect of a rise in wages: With higher wages, workers will give greater value to working than leisure. With work more profitable, there is a higher opportunity cost of not working. The substitution effect causes more hours to be worked as wages rise.

b) Income effect of a rise in wages: This occurs when an increase in wages causes workers to work fewer hours. This is because workers can get a higher income by working fewer hours. Therefore they may work less.