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• W3121997756 abstract "ABSTRACTIntermediate microeconomics textbook employ indifference curve analysis to explain the income and substitution effects of a change in the price of a good x on the demand for it, holding other variables constant. Further, they demonstrate how the shape and slope of the demand curve changes depending on whether good x is defined as normal, inferior, or Giffen. This analysis in turn enables an evaluation of public policies aimed to increase consumer welfare. Unfortunately, these textbooks do not apply a parallel analysis in production theory, creating an analytical vacuum at the undergraduate level. This paper develops a model to analyze the output and substitution effects in production when the price of one input (labor) changes, holding technology, resource availability, and the price of the other input constant. This study will also address the production equivalents of normal, inferior, and possibly Giffen inputs affecting the shape and slope of the input demand curve. Such an exercise may allow students to gain a better understanding of producer and consumer theories, and encourage them to employ these concepts to real economic problems such as the effect of wage subsidies on labor demand. It should therefore be included in intermediate microeconomics textbooks.JEL: A22, D11, D24KEYWORDS: Substitution Effect, Output Effect, Isoquants, Consumer Theory, Producer TheoryINTRODUCTIONEvery intermediate microeconomics textbook devotes substantial attention to the income and substitution effects of a change in the price of a good on a consumer's demand for that good using indifference curve analysis. The good in question may be defined as a normal good, an inferior good, or a Giffen good. While these are rather tricky concepts for students to understand, the reward for understanding them is considerable. For example, knowledge of these effects have allowed students to better understand how and why the labor supply curve may be backward bending, or why an increase in income taxes may cause some people to decrease their labor supply, while others may work more. Further, because of its subtle insights economists have debated many policies, among them, whether the food stamp voucher system or a cash subsidy is more effective in increasing the welfare of its recipients (Pindyck and Rubinfeld, 2013; Perloff, 2012; Salvatore 2008; Browning and Zupan, 2004; Nicholson, 2002; Mansfield and Yohe, 2003).The production equivalent of the income and substitution effects, namely the output and substitution effects, using isoquant analysis is rarely if ever adopted in intermediate microeconomics textbooks (e.g., Salvatore 2008; Mansfield and Yohe, 2003; Varian, 2010; Pindyck and Rubinfeld, 2013; Perloff, 2012) to analyze the labor demand curve for an individual firm. In addition, neither general nor academic Internet sites (About.com Economics, 2012; Resources for Economists on the Internet, 2012) cover such analyses. It is the contention in this paper that integrating these effects into intermediate textbooks will provide a service to the discipline. These concepts may not only be useful to those preparing for graduate school; they may also facilitate a better learning in the intermediate macro and other advanced economic courses, such as industrial organization and public finance, at the undergraduate level. Further, it may stimulate research, such as the impact of wage subsidies on labor demand that has hitherto been ignored. This paper develops a framework to integrate the output and substitution effects of price changes on labor demand into the intermediate microeconomics curriculum and textbooks.The rest of this paper is organized as follows. In the next section, we provide a brief review of the literature, after which we analyze the substitution and output effects of a change in the price of labor on employment and output. We do this in different stages: we first assume that labor is a normal factor, after which we tackle the analysis assuming labor is inferior, and finally we take the logical next step with a comment on labor taking on Giffen characteristics. …" @default.
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• W3121997756 title "Integrating the Output and Substitution Effects of Production into the Intermediate Microeconomics Textbook" @default.
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