Pizza (P)

Figure 6-4 and 7-1: Income and

substitution effect

B
A

3
2

BC2
0

4.89

Income effect Substitution effect

BC*
10

BC1
12

14

Movies (M)

Figure 7-2: Price change with an inferior good

S

3.3

1.4

BC2
6

8.3

Substitution effect
Inc. effect Total effect

BC3

BC1
25
P

Figure 7-3: Labor leisure trade-off

Goods
(Price of goods = 1)

24w

Slope of budget constraint = -w

BC
24

Leisure
Work

Goods

Figure 7-4: Income and substitution

effects for labor supply: income effect
does not dominate
C

C3

C2
C1

B
A
BC2

BC*
N2 N3 N1
Income effect
Substitution effect

BC1
Leisure
Work

Goods

Figure 7-5: Income and substitution effects

for labor supply: income effect dominates

C3
C2

B
A

C1

BC2
BC*
N2

N1

BC1
N3

Income effect
Substitution effect

Leisure
Work

Consumers Decision

24W2

12W2

Goods
24W1

8W1

12

16

BC2

BC1
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

12

Labor

MIT OpenCourseWare
http://ocw.mit.edu

14.01SC Principles of Microeconomics

Fall 2011

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