Biology Forums - Study Force

"When a worker's wage rate changes, there are two opposing effects—an income effect and a substitution effect."  Explain the meaning of the quote.

When the wage rate changes, two things occur simultaneously—the worker's purchasing power changes and the opportunity cost of leisure time changes.  The income effect and the substitution effect reflect the change in leisure (or hours worked) that occur as a result of these two opposing forces.  The income effect is the change in leisure consumption (or hours of work) due to the change in purchasing power conferred by the wage change, holding the wage at its initial value.  The substitution effect, on the other hand, is the change in leisure consumption (or hours of work) that occurs due to the change in the opportunity cost of leisure, holding the worker at a given utility level (thus holding real purchasing power constant).