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I probably should have
started with this--
if you increase the wage, will
people work more or less hard?
Your initial instinct would
have been more hard.
You would have thought, well,
if your wage goes
up, you work harder.
But that's because your instinct
was focused on the
substitution effect.
You're thinking about
the income effect.
Here's a case where
I started at N1.
The substitution effect
leads me to N2.
But I feel so much richer from
that higher wage that I
actually move all
the way to N3.
My leisure goes up, and
I work less hard.
Now, unlike a Giffen good, this
is totally plausible.
Why is it plausible?
Well, let me do give you
a simple intuition
for why it's plausible.
Let's say that you're someone
who has a certain amount of
things you want to
buy every week.
You don't save. You have a
certain amount of things you
want to buy every week.
You have to pay your rent, you
have to buy your food, you
have to buy your other goodies,
a certain budget.
A lot of people live
on a budget.
You have a certain budget.
And the truth is you're happy
with that budget.
That's kind of what
you want to do.
Now let's say I doubled
your wage.
Well, now to meet the budget you
can work half as hard and
still meet the same budget.
So you'll work less hard.
You could say, look, I can get
more leisure and consume the
same amount of goods
as I did before.
So I'll work less hard.
That's a totally
plausible case.
That's a case of what we
call target income.
If someone has a target income,