Figure 6-4 and 7-1: Income and

substitution effect

Pizza (P)

4 B
C A
3

BC2 BC* BC1

0
0 2 4 4.89 6 8 10 12 14
Movies (M)
Income effect Substitution effect
 Figure 7-2: Price change with an inferior good

B
5

A
3.3

1.4 C

BC1
BC2 BC3
6 8.3 25
Substitution effect P
Inc. effect Total effect
 Figure 7-3: Labor – leisure trade-off

Goods
(Price of goods = 1)

24w Slope of budget constraint = -w

BC
24
Leisure
Work
 Figure 7-4: Income and substitution
effects for labor supply: income effect
Goods
does not dominate

C3 C

B
C2

A
C1

BC2

BC* BC1
N2 N3 N1
Leisure
Income effect Work
Substitution effect
 Figure 7-5: Income and substitution effects
Goods for labor supply: income effect dominates

C3 C

B
C2

C1 A

BC2

BC* BC1
N2 N1 N3
Leisure
Income effect
Work
Substitution effect
 Consumer’s Decision

24W2

12W2 B
Goods

24W1

8W1 A BC2

BC1
12 16 Leisure
Figure 7.6:
Deriving
leisure
demand and
labor supply
 Figure 7.6: Deriving leisure
demand and labor supply
Wage

W2

Demand for Leisure

W1

12 16 Leisure
 Supply of labor
Wage

W2

W1

8 12 Labor
MIT OpenCourseWare
http://ocw.mit.edu

14.01SC Principles of Microeconomics

Fall 2011

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