Income-leisure trade-off
Also called: Labour-leisure trade-off, Labour-leisure choice · Topic: Factors of Production, Entrepreneurship and Startups · NCERT: Class 12, Ch 5 "Market Equilibrium"
Meaning
Every person has limited hours in a day. Each hour spent working earns income, and each hour of leisure (free time) gives up that income. People enjoy leisure but also value what their pay can buy, so they must choose how to split their time. This choice decides the supply of labour. A wage rise works in two ways. It makes leisure costlier, so people tend to work more. It also makes them richer, so they may choose to work less.
Example
A tailor earning ₹200 an hour gives up ₹200 for every hour of rest. If the rate rises to ₹300, resting costs more, but the tailor can also reach their target income in fewer hours and may choose to rest more.
Don't confuse with
- Backward-bending labour supply curve: this is the result of the trade-off. It shows that at high wages the income effect can make a person work fewer hours.
Related concepts
- Derived demand
- Demand for labour
- Marginal revenue product of labour
- Value of marginal product of labour
- Labour market
- Supply of labour
- Backward-bending labour supply curve
- Equilibrium wage rate
- Wage rate