As wages increase above the subsistence level (discussed below), there are two considerations

affecting a worker's choice of how many hours to work per unit of time (usually day, week, or month).
The first is the substitution or incentive effect. With wages rising, this says that the trade-off between
working an additional hour for pay and taking one extra hour of non-paid time changes in favour of
working. Thus, more hours of labor-time will be offered at the higher wage than the lower one. The
second and countervailing effect is that the hours worked at the old wage rate now all gain more
income than before, creating an income effect that encourages more leisure to be chosen because it
is more affordable. Most economists assume that non-paid time (or "leisure") is a "normal"
good which means that people want more of it as their incomes (or wealth) rise. Since a rising wage
rate raises incomes, all else constant, the attraction of non-paid time rises, eventually cancelling out
the substitution effect and implying the backward bend.
Referring to the graph, if real wages were to increase from W1 to W2 then for an individual worker
the substitution effect outweighs the income effect; therefore, they would be willing to increase their
hours worked for pay from L1 to L2. However, if the real wage increased from W2 to W3, then the
number of hours offered to work for pay would fall from L2 to L3. This is because the strength of the
income effect now exceeds that of the substitution effect: the utility to be gained from an extra hour
of non-paid time is now greater than the utility to be gained from extra income that could be earned
by working the extra hour.
The above only examines the effect of changing wage rates on workers already subject to those
rates that is, only these individuals' labour supply response was considered. It did not consider
the additional labour supplied by workers working in other sectors (or unemployed), who are now
more attracted to the jobs in the sector paying higher wages. Thus, for a given market, the wage at
which the labour supply curve bends backward may be higher than the wage at which a given
worker's curve bends back.
On the other hand, for the aggregate labor market, that is, a labor market without "other sectors" for
workers to come from, the original story of the backward-bending labor-supply curve applies, except
to the extent that some workers suffer from involuntary unemployment.


At very low wage levels that is, near the subsistence level the supply curve may also be curved
backwards for a completely different reason. This effect creates an "inverted S" or "backward S"
shape: a tail is added at the bottom of the labor-supply curve shown in the graph above with the
quantity of labor-time supplied falling as wages rise. In this case, because families face some
minimum level of income needed to meet their subsistence requirements, lowering
wages increasesthe amount of labor-time offered for sale. Similarly, a rise in wages can cause a
decrease in the amount of labor-time offered for sale: individuals take advantage of the higher wage
to spend time on needed self- or family-maintenance activities.

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, supply increases.
The income effect states that a higher wage means workers can achieve a target income by
working less hours. Therefore, because it is easier to get enough money they work less.
When your wage is low, the substitution effect dominates. As wages increase, the income
effect starts to dominate.






In economics, elasticity is the measurement of how responsive an economic variable is to a change
in another. For example:
"If I lower the price of my product, how much more will I sell?"
"If I raise the price of one good, how will that affect sales of this
other good?"
"If we learn that a resource is becoming scarce, will people
scramble to acquire it?"
An elastic variable (or elasticity value greater than 1) is one which responds more than proportionally
to changes in other variables. In contrast, an inelastic variable (or elasticity value less than 1) is one
which changes less than proportionally in response to changes in other variables.
Elasticity can be quantified as the ratio of the percentage change in one variable to the percentage
change in another variable, when the latter variable has a causal influence on the former. A
more precise definition is given in terms of differential calculus. It is a tool for measuring the
responsiveness of one variable to changes in another, causative variable. Elasticity has the
advantage of being a unitless ratio, independent of the type of quantities being varied. Frequently
used elasticities include price elasticity of demand, price elasticity of supply, income elasticity of
demand,elasticity of substitution between factors of production and elasticity of intertemporal
substitution.
Elasticity is one of the most important concepts in neoclassical economic theory. It is useful in
understanding theincidence of indirect taxation, marginal concepts as they relate to the theory of the
firm, and distribution of wealth and different types of goods as they relate to the theory of consumer
choice. Elasticity is also crucially important in any discussion of welfare distribution, in
particular consumer surplus, producer surplus, or government surplus.
In empirical work an elasticity is the estimated coefficient in a linear regression equation where both
the dependent variable and the independent variable are in natural logs. Elasticity is a popular tool
among empiricists because it is independent of units and thus simplifies data analysis.
A major study of the price elasticity of supply and the price elasticity of demand for US products was
undertaken by Hendrik S. Houthakker and Lester D. Taylor.
[1]

Contents
[hide]
1 Specific elasticities
o 1.1 Elasticities of supply
o 1.2 Elasticities of demand
2 Applications
3 Variants
4 See also
5 Footnotes
6 External links
Specific elasticities[edit]
Elasticities of supply[edit]
Price elasticity of supply
Main article: Price elasticity of supply
The price elasticity of supply measures how the amount of a
good that a supplier wishes to supply changes in response to a
change in price.
[2]
In a manner analogous to the price elasticity
of demand, it captures the extent of movement along the supply
curve. If the price elasticity of supply is zero the supply of a good
supplied is "inelastic" and the quantity supplied is fixed.
Elasticities of scale
Main article: Returns to scale
Elasticity of scale or output elasticities measure the percentage
change in output induced by a percent change in
inputs.
[3]
A production function or process is said to
exhibit constant returns to scale if a percentage change in inputs
results in an equal percentage in outputs (an elasticity equal to
1). It exhibits increasing returns to scale if a percentage change
in inputs results in greater percentage change in output (an
elasticity greater than 1). The definition of decreasing returns to
scale is analogous.
[4]

Elasticities of demand[edit]
Price elasticity of demand
Main article: Price elasticity of demand
Price elasticity of demand is a measure used in economics to
show the responsiveness, or elasticity, of the quantity
demanded of a good or service to a change in its price. More
precisely, it gives the percentage change in quantity demanded
in response to a one percent change in price (ceteris paribus,
i.e. holding constant all the other determinants of demand, such
as income).
Applications[edit]
The concept of elasticity has an extraordinarily wide range of
applications in economics. In particular, an understanding of
elasticity is fundamental in understanding the response
of supply and demand in a market.
Some common uses of elasticity include:
Effect of changing price on firm revenue. See Markup rule.
Analysis of incidence of the tax burden and other
government policies. See Tax incidence.
Income elasticity of demand can be used as an indicator of
industry health, future consumption patterns and as a guide
to firms investment decisions. SeeIncome elasticity of
demand.
Effect of international trade and terms of
trade effects. See MarshallLerner condition and Singer
Prebisch thesis.
Analysis
of consumption and saving behavior. See Permanent
income hypothesis.
Analysis of advertising on consumer demand for particular
goods. See Advertising elasticity of demand
Variants[edit]
In some cases the discrete (non-infinitesimal) arc elasticity is
used instead. In other cases, such as modified duration in bond
trading, a percentage change in output is divided by a unit (not
percentage) change in input, yielding a semi-elasticity instead.
See also[edit]

Economics portal
Arc elasticity
Elasticity of a function
Footnotes[edit]
1. Jump up^ Hendrik S. Houthakker, Lester D. Taylor
(1970).
2. Jump up^ Perloff, J. (2008). p.36.
3. Jump up^ Varian (1992). pp.1617.
4. Jump up^ Samuelson, W. & Marks, S. (2003). p.233.