Answer to Question #81948 in Microeconomics for Rahul

Question

Is labour supply curve always positively sloped? True or false, explain.

Answer 1

False. A typical supply curve shows an increase in supply as wages rise. It slopes from left to right. However, in labour markets, we can often witness a backward bending supply curve. This means after a certain point, higher wages can lead to a decline in labour supply/ The reason is that there are two effects related to determining supply.

The substitution effect states that a higher wage makes work more attractive than leisure. Therefore, in response to higher wages, supply increases because work gives greater remuneration.

The income effect states that a higher wage means workers can achieve a target income by working fewer hours. Therefore, if wages increase, it becomes easier to get enough income through working fewer hours.