3.7 Elasticities of demand Elasticity is a measure of the sensitivity between two variables. The elasticity of the demand for labor: E D L = ∆%L / ∆%W < 0 Always (-), by convention we can ignore the sign: | E D L | = 0  perfectly inelastic 0 < | E D L | < 1  inelastic | E D L | = 1  unit elastic | E D L | > 1  elastic | E D L | = ∞  perfectly elastic EXAMPLE

3.7 Elasticities of demand Determinants of E D L ? (Marshall-Hicks) 1.Elasticity of demand for the commodity E D C i.Monopoly? ii.Long run? 2.Ratio labor costs/ total costs L-intensive industries (services) 3.Substitutability of inputs 4.Elasticity of supply of other inputs Empirically: E D L is higher in younger than older people, in blue-collar than white-collar workers, in low-skill than high- skill…why?

4. The supply of labor 4.1 Work-leisure decision When a person looks for a job he is in the LF. The PR is an index of the disposition of people to work How do people make decisions regarding supply L (S L )? Decision work – leisure  basic model Individuals: Education, skills, experience…and time Time: work (L) & leisure (l)  maximization of utility (U) Thus, two sets of information that determine the optimal distribution of t by certain i Subjective or psychological information (IC), or objective or market information (BC)

4.2. Indifference curves Definition: combinations of real income-leisure that provide certain level of utility (or satisfaction) to the i Features: 1.Negative slope (trade-off): “y” ($) & “l” (hours) only two sources of satisfaction 2.Convex to origin: slope drops to the SE i.Subjective disposition ii.Varies depending on y 0 & l 0 MRS: slope  “flatter” towards SE; the MRS is the quantity of “y” we sacrifice to earn an additional unit of “l” (U)

4.2. Indifference curves 3.Indifference map: each IC represents a different level of utility (set of IC)  towards NE U goes up i.Maximization ii.IC’s do not cross 4.Different preferences L-l: shape of IC’s, varies from i to i “Workaholic” v. “Leisure lover”  MRS WA << MRS LL These differences can be accounted for: preferences, occupations, personal circumstances