Labor Economics · intro
What moves on the Labor-Leisure Tradeoff diagram
A higher wage rotates the budget line outward. Substitution and income effects pull hours in opposite directions and can offset, which is why higher pay does not always mean longer hours.
You start at your preferred split of the day between leisure and earning.
The hourly rate jumps: every hour of leisure now costs you more forgone pay.
The budget line swings out: any given work effort now buys more consumption.
Substitution says work more; the income effect says relax more. With these preferences they cancel, so hours barely move while consumption rises.
Examiners ask this as: overtime, time and a half, higher hourly pay, wage increase, penalty rates.
Other scenarios on Labor-Leisure Tradeoff