Transportation Economics

Week II

BASIC ECONOMICS
BASIC ECONOMICS
MODULE OUTCOMES

Introduction to Economics Supply

and demand
Short term versus long term
Markets in action
Microeconomics & macroeconomics
Macroeconomics theory Economic
growth & development Labour
market
INTRODUCTION TO
ECONOMICS
 THE ECONOMIC PROBLEM OF
SCARCITY, CHOICE & OPP COST
When wants exceed the resources available to
satisfy them, there is scarcity.
The condition that arises because available
the resources are insufficient to satisfy wants.
Faced with scarcity, people must make
choices.
 Choosing of one thing means having less of
something
more else.
The opportunity cost of any action is the
best alternative forgone.
 WHAT IS ECONOMICS?

●
Economics
The social science that studies the choices that we
make as we cope with scarcity and the incentives that
influence and reconcile our choices.

Here are some examples of scarcity and the trade-offs associated

with making choices:
• You have a limited amount of time. If you take a part-time job, each
hour on the job means one less hour for study or play.
• A city has a limited amount of land. If the city uses an acre of land
for a park, it has one less acre for housing, retailers, or industry.
• You have limited income this year. If you spend $70 on a music CD,
that’s $70 less you have to spend on other products or to save.
 MICRO VS MACRO
Microeconomics
Microeconomics : The study of the choices that
individuals and businesses make, the way these
choices interact, and the influence that
governments exert on these choices.
Macroeconomics
Macroeconomics : The study of the aggregate (or
total) effects on the national economy and the
global economy of the choices that individuals,
businesses, and governments make.
 WHAT IS ECONOMICS?

The Three Key Economic Questions: What, How,

and Who?
The choices made by individuals, firms, and
governments answer three questions:
1 What products do we produce?
2 How do we produce the products?
3 Who consumes the products?
 PLANNED, MARKET &
MIXED ECONOMIES
Planned economy – the government decides how
resources are allocated to the production of particular
goods.

Market economy - the government plays no

role in allocating resources.

Mixed economies – the government and the

private sector jointly solve economic problems
 WHY ECONOMICS IS
WORTH STUDYING
Understanding
Economic ideas are all around you. You cannot ignore
them.
As you progress with you study of economics, you’ll
gain a deeper understanding of what is going on around
you.
Expanded Career Opportunities
Knowledge of economics is vital in many fields such as
banking, finance, business, management, insurance, real
estate, law, government, journalism, health care and the
arts.
PRODUCTION POSSIBILITIES
The PPF is a valuable tool for illustrating the
effects of scarcity and its consequences.
Production Possibilities Frontier
The boundary between the combinations of
goods and services that can be produced and the
combinations that cannot be produced, given the
available factors of production and the state of
technology.
 PRODUCTION POSSIBILITIES

Figure 1 shows the

PPF for bottled water
and CDs.

Each point on the graph

represents a column of
the table.

The line through the

points is the PPF.
PRODUCTION POSSIBILITIES
 The PPF puts three features of production
possibilities in sharp focus:
 Attainable and unattainable combinations
 Full employment and unemployment
 PPF are faced with opportunity costs
 Opportunity cost is the cost of the next best
alternative sacrificed when a choice is made
 OPPORTUNITY COST
Moving from C to B, the 1 CD costs 1/2 of a bottle of
water.
 EXPANDING PRODUCTION POSSIBILITIES

A sustained expansion of production possibilities

is called economic growth.
The key factors that influence economic growth
are:
 Technological change
 Expansion of human capital

 Capital accumulation

Technological change is the development of new goods

and services and better methods of production.
Expansion of human capital comes from education and
on-the-job training.
Capital accumulation is the increase in capital resources.
 THE PRINCIPLE OF OPPORTUNITY COST

► FIGURE 2.2
Shifting the Production
Possibilities Curve
An increase in the quantity of
resources or technological
innovation in an economy
shifts the production
possibilities curve outward.
Starting from point f, a nation
could produce more steel
(point g), more wheat (point h),
or more of both goods (points
between g and h).
SUPPLY & DEMAND
 DEMAND
The relationship between the quantity
demanded and the price of a good when all
other influences on buying plans remain
the same.

Illustrate
a table with a price and quantity
demanded.
 LAW OF DEMAND
The Law of Demand
Other things remaining the same,
 If the price of a good rises, the quantity demanded of
that good decreases.
 If the price of a good falls, the quantity demanded of
that good increases.
Demand curve versus demand schedule
DEMAND
DEMAND
Changes in Demand
Change in the quantity demanded
A change in the quantity of a good that people
plan to buy that results from a change in the
price of the good.
Change in demand
A change in the quantity that people plan to buy
when any influence other than the price of the
good changes.
 DEMAND
The main influences on buying plans that change demand are:

Prices of complementary/substitute goods

Consumer Income (normal goods e.g. laptop & inferior goods
e.g. Sasco bread)
Price Expectations
Number of buyers –the greater the no. of buyers in a mkt, the
larger the dd for any good
Tastes & Preferences – when prefs change, the demand
for items increases & dd for another item decreases
DEMAND
Demand: A
Summary
 SUPPLY
Quantity supplied
The amount of a good, service, or resource that people are
willing and able to sell during a specified period at a specified
price.

The Law of Supply

Other things remaining the same,
If the price of a good rises, the quantity supplied of that
good increases.
Ifthe price of a good falls, the quantity supplied of that
good decreases.
SUPPLY
SUPPLY
Changes in Supply
Change in quantity supplied
A change in the quantity of a good that suppliers
plan to sell that results from a change in the price
of the good.
Change in supply
A change in the quantity that suppliers plan to
sell when any influence on selling plans other
than the price of the good changes.
 SUPPLY
Figure 4.7 shows
changes in supply.

1.When supply decreases,

the supply curve shifts
leftward from S0 to S1.

2.When supply increases,

the supply curve shifts
rightward from S0 to S2.
 SUPPLY
The main influences on selling plans that change supply
are:
Prices of related goods
Prices of resources and other Inputs
Expectations

Number of sellers
Productivity
 THE PRICE ELASTICITY OF DEMAND

● price elasticity of demand (Ed)

A measure of the responsiveness of the quantity
demanded to changes in price; equal to the absolute
value of the percentage change in quantity
demanded divided by the percentage change in
price.

●Elasticity
Elastic > 1
Inelastic < 1
Unitary = 1
 THE PRICE ELASTICITY OF DEMAND

Price Elasticity and the Demand Curve

●perfectly inelastic demand
The price elasticity of demand is zero.

FIGURE 5.1 (cont’d.)

Elasticity and Demand
Curves
 THE PRICE ELASTICITY OF DEMAND

Price Elasticity and the Demand Curve

●perfectly elastic demand
The price elasticity of demand is infinite.

FIGURE 5.1 (cont’d.)

Elasticity and Demand
Curves
 THE PRICE ELASTICITY OF DEMAND

Other Determinants of the Price Elasticity of

Demand
SHORT RUN VS LONG TERM
 SHORT RUN vs LONG
RUN

The Short Run: Fixed Plant

The short run is a time frame in which the quantities
of some resources are fixed.
In the short run, a firm can usually change the quantity

of labor it uses but not the quantity of capital

The Long Run: Variable Plant
The long run is a time frame in which the quantities of
all resources can be changed.
A sunk cost is irrelevant to the firm’s decisions.
SHORT-RUN
COST
SHORT-RUN PRODUCTION
 To increase output with a fixed plant, a firm
must increase the quantity of labor it uses.
 We describe the relationship between output
and the quantity of labor by using three
related concepts:
 Total product (total quantity produced)
 Marginal product
 Average product
SHORT-RUN PRODUCTION
Total Product
Total product (TP) is the total quantity of a
good produced in a given period.
Total product is an output rate—the number of
units produced per unit of time.
Totalproduct increases as the quantity of labor
employed increases.
 SHORT-RUN PRODUCTION
Figure 9.2 shows the total
product and the total
product curve.
Points A through H on the
curve correspond
to the columns of the
table.
The TP curve is like the
PPF: It separates
attainable points and
unattainable points.
 SHORT-RUN PRODUCTION
Marginal Product
Marginal product is the change in total product
that results from a one-unit increase inthe quantity of
labor employed.
 It tells us the contribution to total product of
adding one more worker.
When the quantity of labor increases by more (or
less) than one worker, calculate marginal product as:
Marginal product = Change in Change in
total product quantity of labor
 SHORT-RUN PRODUCTION

The table calculates

marginal product
and the orange bars in
part (b) illustrate it.

Notice that the

steeper the slope of
the TP curve, the
greater is marginal
product.
 SHORT-RUN PRODUCTION
The total product and
marginal product curves
in this figure incorporate
a feature of all production
processes:
•Increasing marginal
returns initially
•Decreasing marginal
returns eventually

•Negative marginal
returns
SHORT-RUN PRODUCTION
 Increasing Marginal Returns
 Increasing marginal returns occur when the

marginal product of an additional worker

exceeds the marginal product of the previous
worker.
 Increasing marginal returns occur when a small
number of workers are employed and arise
from increased specialization and division of
labor in the production process.
SHORT-RUN PRODUCTION
 Decreasing Marginal Returns
 Decreasing marginal returns occur when the

marginal product of an additional worker is less

than the marginal product of the previous
worker.
 Decreasing marginal returns arise from the fact
that more and more workers use the same
equipment and work space.
 As more workers are employed, there is less
and less that is productive for the additional
worker to do.
 SHORT-RUN PRODUCTION
 Decreasing marginal returns are so pervasive that
they qualify for the status of a law:
 The law of decreasing returns states that:
As a firm uses more of a variable input, with a given
quantity of fixed inputs, the marginal product of the
variable input eventually decreases.
SHORT-RUN PRODUCTION
Average Product
Average product is the total product per worker
employed.
It is calculated as:

Average product = Total product Quantity

of labor
Another name for average product is

productivity.
 SHORT-RUN PRODUCTION
When marginal product is less than
average product, average product
is decreasing.
When marginal product equals
average product, average product is
at its maximum.
9.3 SHORT-RUN COST
 To produce more output in the short run, a firm
employs more labor, which means it must
increase its costs.
 We describe the relationship between output
and cost using three cost concepts:
 Total cost
 Marginal cost

 Average cost
9.3 SHORT-RUN COST
Total Cost
A firm’s total cost (TC) is the cost of all the
factors of production the firm uses.
Total cost divides into two parts:
Total fixed cost (TFC) is the cost of a firm’s

fixed factors of production used by a firm—the

cost of land, capital, and entrepreneurship.
Total fixed cost doesn’t change as output
changes.
 9.3 SHORT-RUN COST
 Total variable cost (TVC) is the cost of the variable
factor of production used by a firm—the cost of
labor.
 To change its output in the short run, a firm must
change the quantity of labor it employs, so total
variable cost changes as output changes.
 Total cost is the sum of total fixed cost and total
variable cost. That is,
 TC = TFC + TVC
 Table 9.2 on the next slide shows Sam’s Smoothies’
costs.
SHORT-RUN COST
 SHORT-RUN COST
Figure 9.6 shows Sam’s
Smoothies’ total cost curves.

Total fixed cost (TFC) is

constant—it graphs as a
horizontal line.
Total variable cost (TVC)
increases as output increases.

Total cost (TC) also

increases as output
increases.
 SHORT-RUN COST
The vertical distance
between the total cost curve
and the total variable cost
curve is total fixed cost, as
illustrated by the two
arrows.
SHORT-RUN COST
Marginal cost
A firm’s marginal cost is the change in total cost
that results from a one-unit increase in total
product.
Marginal cost tells us how total cost changes as
total product changes.
Table 9.3 on the next slide calculates marginal
cost for Sam’s Smoothies.
SHORT-RUN COST
Average Cost
There are three average cost concepts:
Average fixed cost (AFC) is total fixed cost per

unit of output.
Average variable cost (AVC)is total
variable cost per unit of output.
Average total cost (ATC) is total cost per unit of

output.
 SHORT-RUN COST
The average cost concepts are calculated from the
total cost concepts as follows:
TC = TFC + TVC
Divide each total cost term by the quantity
produced,
Q, to give
TC
Q = TFC
Q + TVC
Q
or,
ATC = AFC +
AVC
SHORT-RUN COST
 SHORT-RUN COST
The vertical distance between
these two curves is equal to
average fixed cost, as illustrated
by the two arrows.

The marginal cost curve (MC) is

U-shaped and intersects the
average variable cost curve and the
average total cost curve at their
minimum points.
 LONG-RUN COST
Plant Size and Cost
When a firm changes its plant size, its cost of
producing a given output changes.
Each of these three outcomes arise because when a
firm changes the size of its plant, it might
experience:
 Economies of scale
 Diseconomies of scale
 Constant returns to scale
 9.4 LONG-RUN COST
The Long-Run Average Cost Curve
The long-run average cost curve shows the
lowest average cost at which it is possible to
produce each output when the firm has had
sufficient time to change both its plant size and
labor employed.
 LONG-RUN COST
In the long run, Samantha can vary both capital and
labor
inputs.
The long-run average cost curve, LRAC, traces the
lowest attainable average total cost of producing each
output.
 12.4 LONG-RUN COST
Sam’s experiences economies of scale as output increases to
9 gallons an hour, …
constant returns to scale for outputs between 9 gallons and
12 gallons an hour, …
and diseconomies of scale for outputs that exceed 12 gallons
an hour.
MARKETS IN ACTION
 MARKET EQUILIBRIUM
● market equilibrium
A situation in which the quantity
demanded equals the quantity
supplied at the prevailing
market price.

1.Excess demand cause the

price to rise

2.Excess supply cause

the price to drop
DEMAND
Demand: A
Summary
SUPPLY -
SUMMARY
Supply: A Summary
 Elasticity & changes in the equilibrium

 Equilibrium price and equilibrium quantity in a

given market are determined by the intersection of
the supply and demand curves.

 Depending on the elasticities of supply and

demand, the equilibrium price and quantity can
behave differently with shifts in supply and
demand.
 ELASTICITY & CHANGES IN THE EQUILIBRIUM

 If demand is very elastic, then shifts in the supply curve

will result in large changes in quantity demanded and small
changes in price at the equilibrium point.
 ELASTICITY & CHANGES IN THE EQUILIBRIUM

If demand is very inelastic, however, then shifts in the supply curve

will result in large changes in price and small changes in quantity
at the equilibrium point.
 MACRO VS
MICROECONOMICS
 MICRO VS MACRO
Microeconomics
Microeconomics : The study of the choices that
individuals and businesses make, the way these
choices interact, and the influence that
governments exert on these choices.
Macroeconomics
Macroeconomics : The study of the aggregate (or
total) effects on the national economy and the
global economy of the choices that individuals,
businesses, and governments make.
 Macroeconomics questions

 Will tomorrow’s world be more prosperous than

today?
 Will jobs be plentiful?

 Will the cost of living be stable?

 Will the government and the nation remain in

deficit?

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 Macroeconomic Policy
Challenges and Tools
 Five widely agreed policy challenges for
macroeconomics are to:
1.Boost economic growth
2.External stability/balance of payments
3.Lower unemployment / Full employment
4.Price stability
5.Equitable distribution of wealth (income)
 Macroeconomic Policy
Challenges and Tools
 Two broad groups of macroeconomic policy tools
are :
Fiscalpolicy—making changes in tax rates and
government spending
Monetary policy—changing interest rates and changing
the amount of money in the economy
 The Circular Flow
This model captures the essential essence of
macroeconomic activity
The circular flow model illustrates the
mechanism by which income is generated from
goods and services and how this income is
spent.
This provides the basis for the way economists
think about the interactions between different
parts of the economy and the measurement of
economic activity
MACROECONOMICS
THEORY
MACROECONOMIC
VARIABLES
 Gross Domestic Product (GDP)
 Inflation

 Unemployment

 Balance of payments
 Gross Domestic Product
GDP Defined
GDP or gross domestic product, is the market
value of all final goods and services produced in a
country in a given time period.
This definition has four parts:
Market value
Final goods and services

Produced within a country

In a given time period

Gross Domestic Product
 Market Value
 GDP is a market value goods and services
are valued at their market prices.
 To add apples and oranges, computers and ice
cream, we add the market values so we have a
total value of output in rands.

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Gross Domestic Product
 Final Goods and Services
 GDP is the value of the final goods and
services produced.
 A final good (or service) is an item bought by
its final user during a specified time period.
 A final good contrasts with an intermediate
good, which is an item that is produced by one
firm, bought by another firm and used as a
component of a final good or service. ©

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Gross Domestic Product
 Excluding intermediate goods and services avoids
a problem called double counting.
 Produced Within a Country
 GDP measures production within a country domestic
production.
 In a Given Time Period
 GDP measures production during a specific time
period Excluding intermediate goods and services
avoids double counting normally a year or a
quarter of a year. ©

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Nominal vs Real GDP
 Real GDP is the value of final goods and
services produced in a given year when valued
at constant prices.
 The first step in calculating real GDP is to
calculate nominal GDP.
Nominal GDP
 Nominal GDP is the value of goods and
services produced during a given year valued at
the prices that prevailed in that same year.
 Inflation
 Inflation is a a continuos and considerable rise in
price level in general.
 The commonly used indicator of general price
level is the CPI
 To calculate inflation rate - is the percentage
change in the price level.

(P1 – P0)
100
P0
 Inflation
Is Inflation a Problem?
Unpredictable changes in the inflation rate are a problem
because they redistribute income in arbitrary ways between
employers and workers and between borrowers and lenders.
A high inflation rate is a problem because it diverts
resources from productive activities to inflation forecasting.
Eradicating inflation is costly because it brings a period of
greater than average unemployment.

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When an inflation occurs .
 all prices are rising
 oil prices are rising

 all families are spending more money on food

 prices on the average are rising

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 Unemployment
defined
Unemployment is a state in which a person
does not have a job but is available for
work, willing to work, and has made some
effort to find work within the previous four
weeks.
Types of Unemployment
Frictional unemployment
Structural unemployment

Cyclical unemployment

Seasonal unemployment

Disguised/ Hidden unemployment

 Unemployment

Frictional unemployment – This is

unemployment caused by people moving in
between jobs, e.g. graduates or people
changing jobs.
There will always be some frictional
unemployment.
 Unemployment

Structural unemployment is
unemployment created by changes in
technology and foreign competition that
change the skills and location match
between jobs and workers.
Cyclical unemployment is the fluctuation
in unemployment caused by the business
cycle e.g. in a recession AD & thus output
falls.
 Unemployment

Seasonal unemployment is occurs when

employees only work during a certain time(s) of
the year and therefore during other months they
are regarded as unemployed.
Disguised/Hidden unemployed is said to exist
if people who were previously fully employed,
have had their hours.(& salaries) reduced
because of poor business performance
 Costs of unemployment
Why Unemployment Is a Problem
Unemployment is a serious economic, social, and
personal problem for two main reasons:
 Lost production and incomes
 Lost human capital

Lost production and income is serious but

temporary.
Lost human capital is devastating and permanent.
 Balance of payments
A country’s balance of payments accounts
records its international trading, borrowing
and lending. It consists of 4 basic accounts:
1.Current account – reflects the rand value of the goods and
services exported and imported during the period
2.Capital account – records all international borrowing and
lending.
3.Financial account-international transactions involving
financial assets including the borrowing & lending of funds
4.Unrecorded transactions- all errors & ommissions that occur
in compiling the individual components of the BOP.
ECONOMIC GROWTH &
DVPT
 Economic Growth
Economic growth is the expansion of the economy’s
production possibilities—an outward shifting PPF.
We measure economic growth by the increase in real

GDP.
Real GDP—real gross domestic product—is the

value of the total production of all the nation’s farms,

factories, shops, and offices, measured in the prices of
a single year.
The Causes of Economic
Growth: A First Look
For economic growth to persist, people
must face incentives that encourage them
to pursue three activities
Saving and investment in new capital
Investment in human capital

Discovery of new technologies

An increase in labour supply

Decrease in human capital

Increase in productivity ©

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 The Causes of Economic
Growth
Saving and Investment in New Capital
The accumulation of capital has dramatically increased
output and productivity.
Investment in Human Capital
Human capital acquired through education, on-the-job
training, and learning-by-doing has also dramatically
increased output and productivity.
Discovery of New Technologies
Technological advances have contributed immensely to
increasing productivity.
Ongoing economic growth requires all
of the following except .
 saving and investment in new capital
 the discovery of new technologies

 population growth

 investment in human capital

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 Measuring Economic
Growth
When GDP increases, we know that
either
 Weproduced more goods and services or
 We paid higher prices
Producing more goods and services contributes
to an improvement in our standard of living.
Expansion of production is economic growth.
Economic growth is not a smooth process and
hence is related to a phenomenon called
©
business cycle Pear

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Business Cycle Patterns

 The business cycle is a pattern of upswing

(expansion) and downswing (contraction) in the
economy.
 These cycles differ according to the role of
outside force and basic system design.
 BUSINESS CYCLE
Figure 1.1
shows a
business
cycle.
An expansion
ends at a peak
and a recession
ends at a
trough.
 Economic Growth
 Every business cycle has two phases:
 1. A recession - is a period during which real
GDP decreases for at least two successive
quarters.
 2. An expansion - is a period during which real
GDP increases.
 and two turning points:

 1. A peak

 2. A trough ©

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 Cycle Patterns, Impulses
and Mechanisms

 All theories of the business cycle agree that

investment and the accumulation of capital play
a crucial role.
 Recessions begin when investment slows and
recessions turn into expansions when
investment increases.
 Investment and capital are crucial parts of
cycles, but are not the only important parts.
 Causes of fluctuations in
actual growth

Causes of fluctuations in actual growth

In the short-run
 Variations in the growth of aggregate demand – total
spending on goods and services made within a
country
In the long-run
 The growth in Aggregate demand. This determines
whether potential output will be realised
 The growth in potential output
 Economic Growth
Benefits and Costs of Economic Growth
The main benefit of long-term economic growth is
expanded consumption possibilities, including more health
care for the poor and elderly, more research on cancer and
AIDS, better roads, more and better housing and a cleaner
environment.
The costs of economic growth are forgone consumption in
the present, more rapid depletion of non-renewable natural
resources, and more frequent job changes.
THE LABOUR MARKET
 The Labour Market
The market for a factor of
production - labour
Refers to the demand for
labour – by employers
and the supply of labour
(provided by potential
employees) The demand for labour is dependent on the
demand for the final product that labour
produces.The greater the demand for office
space the higher the demand for construction
workers.
Copyright: Bo de Visser, stock.xchng
The Labour Market
The labour market is an example of a factor market
Supply of labour – those people seeking employment
(employees)
Demand for labour – from employers
A ‘Derived Demand’ – not wanted for its own sake but for what it
can contribute to production
Demand for labour related to productivity of labour and the level of
demand for the product
Elasticity of demand for labour related to the elasticity of demand
for the product
The Labour Market
At higher wage rates
the demand for labour
will be less than at
lower wage rates
Reason linked to
Marginal Productivity
Theory
The demand for labour is highly dependent on the
productivity of the worker – the more the worker
adds to revenue, the higher the demand.
Copyright: iStock.com
 The Labour Market
Wage Rate (£ per hour) There is an inverse
relationship between the
wage rate and the number
10 of people employed by
firm.
the

The MRP curve

7
therefore represents the
demand curve for labour
illustrating the derived
4 demand relationship.

DL

10 15 19 Number Employed
The Labour Market
The market demand for labour will shift or
change due to:
The number of firms or employers changes
The number of product changes

The productivity of labour changes

There is a new substitute for labour

The price of substitute changes

The price of a complementary factor of production

changes
 The demand for labour
The Labour Market will shift if:
•Productivity of labour
increases
Wage Rate (£ per week) At
Thea relatively
demand for high
•New
At machinery is used
a lower wage rate the
wage
labourrate of £250 per
is downward
which
firm
week,increases
can
sloping afford
thefrom
value toadded
left take on
to
£250 more
by theworkers.
productivity
right The be
worker must
demand
greater tofor labour
cover theis
inversely
•If there related
cost ofishiring
an thatto the
increase
wage rate
labour.
in the demand for the
Demand is likely to be
good/service
lower. itself
•If the price of the
good/service increases

£100
DL1
DL

Q1 Q3 Q2 Q4
Quantity of labour employed
The Labour Market
The Supply of Labour
The amount of people offering their
labour at different wage rates.
Involves an opportunity cost – work v. leisure
Wage rate must be sufficient
to overcome the opportunity cost of leisure
The Labour Market
The market supply of labour will shift or
change due to:
Tastes (for leisure, income and work)
Income and wealth

Expectations (for income or consumption)

Skill levels required
Size and structure of the population – age, gender, etc.

Opportunity cost of work – income and substitution

effects
The Labour Market
Income effect of a rise in wages:
As wages rise, people feel better off and therefore may not feel a
need to work as many hours
Substitution effect of a rise in wages:
As wages rise, the opportunity cost of leisure rises (the cost of
every extra hour taken in leisure rises). As wages rise, the
substitution effect may lead to more hours being worked.
The net effect depends on the relative strength of the
income and substitution effects