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Every action has a price.
And the price of leisure is the
wage you forgo, The wage
you forgo by sitting around
is the price of leisure.
Let's assume here that the price
of goods is $1, that the
goods you're going
to buy cost $1.
Whatever your consumption,
it costs $1.
That's the trick we always
use with modeling.
Make as many things
$1 as you can.
That makes the model easy.
So let's assume that the price
of the goods you're going to
buy are $1.
So the slope of the budget
constraint is minus w over 1.
The slope of the budget
constraint is just the price
of leisure which is minus w .
So the trade-off with the price
of goods of $1, the
trade-off between taking leisure
and consuming is that
if you take leisure,
an hour of leisure,
you get w fewer goods.
And if you work an hour, you get
w more goods, but you lose
an hour of leisure.
And that gives you the trade-off
between how much you
consume and how much leisure you
take which determines how
much you work.
OK.
Questions about that?
Now let's take this framework
and ask, what happens when the
wage changes, Figure 7-4.
So we have an original
outcome with the
budget constraint BC1.
We have an original budget
constraint, BC1.
Now imagine the wage goes
up, so we move to BC2.
BC2 is a budget constraint
with a higher wage.
The wage goes up.
So what we're going to see is
you're going to move from
point A where you work N1 hours
to point C where you
work N3 hours.
That's where your indifference
curves are tangent with the
new budget constraint.