Basic Income Leisure Model Writing Assignment

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Basic Income Leisure Model
In the usual day-to-day activities, people have a choice to attend to tasks that are profitable yet involving or on the other hand, they can decide to partake in ones that are unproductive commonly referred to as leisure. The decisions that individuals perform in an economy determine many facets of their lives including their career trajectories, academic performance, financial position, and health outcomes among other important factors. Economic models are exceptional tools that advance the understanding of how the real economy functions. The income leisure model assumes that the workers in the economy are involved in productive and non-productive activities only. The productive activities are income-generating ones while non-productive ones are solely leisure activities. Either way, an individual in such an economic model will seek to maximize satisfaction when in any of the activities thereof. Indifference curves can be used to ascertain predictions on these two aspects. The subsequent discussion offers an in-depth analysis of the basic income-leisure model with possible predictions and similar comparisons to the circular flow economic model that has two players: the firms and households.
Essential Assumptions in the Income-Leisure Economic Model
The most profound assumption in this model in the role of choice among workers. People have a choice to go to work. In the ordinary course of things, this is never the case because people are compelled to go to work to suit their other economic demands. However, in the income-leisure model, it is assumed individuals retain the liberty to go to work in which case if they do not, then they remain at home and engage in leisure activities. In this case, remaining at home without engaging in what would be considered leisure is also assumed leisure. Another assumption is that people will move from their leisure activities only when they are offered a reservation wage. This type of wage refers to the minimum wage that is sufficient to guarantee or attract someone away from home or leisure activities and head to work.
On the other hand, there are assumptions to when wage rates change. There are two presuppositions to this, which are evident in the substitution and income effects. Under the income effect, when the wages increase, the person has more freedom and hence, more time to spend on their leisure activities. On the other hand, the substitution effect implies that as the wages rise, the individual has to work more as leisure becomes an opportunity cost. Although this is usually the case, the possibility of income effects outweighing substitution effects can never be disregarded.
Model’s Key Predictions
In defining the model’s key predictions, it is wise to note the respective entities in this economic model. There are individuals and households, which are the smallest entities in the economy. Next are the firms where people provide their labor and earn capital to spend. Finally, there is the government, which guarantees a conducive environment for business activities. Considering the present progress of the global economy, chances are that the level of income amon...