AP Economics Choose Between Work & Studying

Maximizing Utility Where will you maximize your utility between the hours you have in a day, week or month? The more wages you earn, the more g&s you can buy The more you work the less time for leisure but the more $ for leisure Catch 22?

MAXUTILITYMAXUTILITY WAGES (measured in $ & hours) The more wages you earn the more g&s you can buy LEISURE (measured in $ & hours) The more you work the less time for leisure but the more $ for leisure

Circular Flow of Economic Activity HOUSEHOLDS FIRMS Offer G&S for sale Purchase G&S to satisfy wants & needs Buy Resources Offer Resources For Sale

A household’s likelihood to supply labor will change based on a change in its price. –If the price of labor increases, it can be said that households will produce more because the opportunity cost of not working becomes too high for that household to absorb. Ex. “They can’t afford not to work.” This is the substitution effect at work because the cost of work’s substitute is greater than the work itself.

Wage Rate Units of Labor Positive Curve ↑ wages = ↑ more working Substitution Effect Ex) Overtime, working on holidays Labor Supply Curve shows the substitute for working (leisure) is not worth it. S

b. If the price of labor increases it has also been said that households will work less because they now have more income to absorb the opportunity cost of not working and still maintain their lifestyle. Wage Rate Units of Labor S My Salary went up so I will work less and still have the same buying power. Negative Curve: ↑ wage = ↓ working INCOME EFFECT

C.Different households will react differently. Statistics show that the trend in American society is for the income effect to outweigh the substitution effect, and wealthier households will work less and enjoy more leisure time. Most working class families – households will feel substitution effect more. Paying off bills is more of a priority than leisure time. Close to- or retired couples and the already wealthy will choose the income effect. They don’t need more money

2. A household’s likelihood to supply capital to firms will change in a similar way. Households don’t always supply labor to the input market a. Interest rate or r is the price of capital. Can also be reflected in terms of return on investment.

Capital Investments b. As r increases, it can be said that households will provide more capital to firms because the opportunity cost of not doing so would be too great. (substitution effect) 1990 Internet & Tech boom – Big Investments (stocks were getting a high return rate, more than banks.

Capital Investment c. However, as r increases households can save/invest less of their monthly income and achieve the same long-term goals because of the higher rate of return or rate of interest. Thus, sometimes higher r causes less capital for firms. (Income Effect) As I make more from my investments, I will invest less and have the same extra money.

Capital Investment d. Research indicates that higher r leads to higher rates of investment and savings. Rate of interest can also cause households to finance current consumption with future earnings, or they can finance future consumption by saving their current earnings. Sacrifice now for more later