Labor-leisure tradeoff | Microeconomics | Khan Academy

So let's keep talking about labor as a factor of production. In particular, we're going to think about the supply curve of labor.

When you're thinking about the supply or the demand curve for elite labor, when you think about quantity, you could just view that as hours worked in a certain time period—hours worked. And then for the price of labor, you could just view that as wages. We've already thought about what the demand curve for labor would look like. At high wages, not a lot of folks will want to use that labor; it's going to be so expensive they might not be able to afford it.

Then, as wages come down, more people will generally want, will demand that labor, and so they will want more hours for folks to work. This would be our demand curve, or we could call this our labor demand curve.

Now, what about the labor supply curve? What do you think that's going to look like? Well, not a trick question. When wages are low, a lot of folks might say, "Hey, I have other things to do with my time." But then, as wages get higher and higher, they might trade off those other things they're doing. Those other things, in some ways, have a higher opportunity cost; it gets more expensive.

So, they might trade off those other things for working, and so they might collectively work more and more hours. As wages go up, generally speaking, hours worked go up. This is a fairly classic looking labor supply curve.

This dynamic that I just talked about, where people are trying to trade off whether they work or whether they do other things, is typically referred to as the labor-leisure trade-off. Now, in everyday language, when you use the word leisure, it's usually referred to as you relaxing or spending time with friends or enjoying yourself in some ways.

But when people talk about the labor-leisure trade-off in economics, they're really talking about labor or anything that is not labor. So, leisure would include sleeping or eating or using the restroom; all of those would be included. It really should be called the labor-not labor trade-off, but I guess that doesn't sound as good as labor-leisure trade-off.

What you really see happening here is as wages are higher and higher, people are willing to trade off leisure (I'll put that in quotes) for labor.

Now, the effect that we often talk about, why that is, and in a lot of ways it's common sense, that's the substitution effect. As wages go higher, you could view the opportunity cost of leisure; it gets more and more expensive.

If anything gets more expensive, you try to substitute it with other things. In this case, you could substitute it with more labor by just working more.

Now, there is an interesting dynamic that some people talk about, which is the income effect. The income effect is as your wages go up, you tend to want to buy or demand more of everything. You could view leisure as a good that you, as a worker, might want.

So, there might be a dynamic that if income gets above a certain level, that you actually might not want to work more; you actually might want more leisure because you have more than enough to supply all of your needs.

So, if you wanted to imagine what a labor supply curve would look like if you could imagine the income effect kicking in at higher wages, it actually could look something like this: at low wages, it could look very similar to what we just described, but then there might be some wage where people are like, "You know what, I have enough money. Rather than just working that extra hour, I actually might want to spend that time with my family or go on vacation."

In a lot of ways, it's a very healthy mindset. In my personal opinion, I don't think enough people have that mindset. But if that were the case, at some point when wages get to a certain point, people actually might want to work less.

So, you would have this backward bending labor supply curve. So let me write this: this is a labor supply curve with the income effect after a certain point—income effect.

So it's an interesting thing to think about. Is there a certain income level above which people say, "You know what, I have enough, and rather than work harder, I actually might work a little bit less"? Interesting to think about.