Income Compensated Demand Curve
Since the market demand curve is also got from the budget lines and the utility curves, it will be a little surprising when we get to think that it can be done in the case of supply curve too. In order to make it clear in this aspect, consider the following graph:
In the above case, there are indifference curves that are shown here for income and also for leisure. It can be seen that the income part is desirable; since it is the one which lets you get the other desirable things. The other one is leisure, which is also a desirable one as it lets you enjoy the income you have got.
In order to get a supply curve for the same, in case of the labor, we need to see the changes in the wage rate. In case of the higher wage rate, the leisure that a person wants would be lesser, as shown in the graph. In case of increase in income, there us a decreased level of work that he does. This means that his leisure is increasing with increase in income. In case of leisure –wage decision at higher wages is a totally different thing. They are two opposites.
Substitution Effect and The Income Effect:
In that case, in higher wages, people are able to substitute work with leisure. This is the way substitution effect takes place. This is caused due to the budget line. The higher wages also see an increase in income, which means they are in search of greater levels of leisure. This would be the income effect. This income effect is caused as a result of the budget line too. It varies according to the distance of the budget line from the origin.
Though they are two concepts that go hand in hand, they tend to pull away from each other in the opposite directions. They can even lead to the cancellation of each other. This happens in the case of labor.