The previous chapter surveyed the demand side of the markets for resource services. This chapter deals with the supply side – how people choose among possible uses of the productive assets they possess, and especially their labor power. The analysis then brings supply and demand together to show how prices and quantities are determined in the factor markets.
THE OPTIMUM OF THE RESOURCE-OWNER
In Chapter 4 the individual was assumed already endowed with a certain amount of income. But income does not come out of thin air. To earn income, owners of resources offer them for hire in the market. Or, alternatively, owners can retain the resources for personal reservation uses. A person's time, for example, considered as an owned resource, can be divided between market work and leisure. (In economics “leisure” does not mean merely lazing away the hours. It includes time devoted to biological necessities like sleep as well as socially valuable nonmarket activities such as homemaking and community service.)
Figure 13.1 shows a resource-owner's possible choices between income I and leisure R. The arrows (preference directions) indicate that income and leisure are both “goods” rather than “bads.” Note the similarity with the choice situation of the consumer in Chapter 4, Figure 4.1. At the initial “endowment” position E in the diagram, the individual starts with R̄ units of time available (24 hours per day, let us say) plus Ī dollars of income from other sources (possibly from gifts or property earnings).