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To be honest, they're just
not that interesting for
consumption.
The book makes a big deal out
of them and talks about
consumer price indices
and all that.
It's just not that important
for consumption.
Because we know in consumption
if prices goes
up, you consume less.
It's just not that
interesting.
It's much more interesting for
things like labor supply.
And we talk about savings
in a number of lectures.
It's the same thing.
There, it's more interesting.
Because now they can often
offset each other in
meaningful ways.
And so now this is why the
tools of income and
substitution effects become
much more important.
OK?
So if we put this together, if
we go to Figure 7-6, we can
now think about deriving where
labor supply comes from.
Where does labor supply
come from?
Well, first, you've got the
consumer's decision of how
hard to work.
So here's a case.
It's sort of small, but
you can take a look.
Here's a case where you've got
someone initially working,
taking 16 hours of leisure and,
therefore, working eight
hours, at a wage of W1.
Now their wage goes up to W2.
They choose to take 12 hours
of leisure and, therefore,
work 12 hours.
This is someone who works harder
when the wage goes up.
That is, the income effect
does not offset the
substitution effect.
Now, we can take that to draw
a demand for leisure curve
just like we drew any
other demand curve.
It's the same technique
as last time.
Just bring those point and say,
look, at a wage of W1,