Note the income and substitution effects as explained at the top of p. 796. As pay rates rise, we may decide to substitute more work for leisure. Clearly, the higher pay provides an incentive to work more. The opportunity cost of not working rises as pay increases. Alternatively, as compensation increases, we may be induced to substitute more leisure for work since we don't need the extra money quite as much as we used to. If our lifestyle is good, we can maintain it and forgo the additional income. However, this effect seems more applicable to very high paying occupations. For most individuals, the substitution effect is stronger than the income effect.

Follow the explanation of the work v. leisure tradeoff on pp. 797-98.

Note the author's presentation of the elasticity of labor supply and demand, pp. 798-800. In some cases, a firm may be able to respond quickly to a price increase. If the price of a firm's product increases 10% and a firm increases production by 20%, this would indicate an elastic supply. A production increase of only 5% would indicate an inelastic supply.

If wage rates go up 10% and a firm lets 15% of its work force go, this would indicate an elastic demand for labor. If only 3% were laid off, then this would show an inelastic demand for labor.

Arguably, labor is the most important factor of production because approximately 75% of the returns to all factors of production go to labor. In addition, when unemployment rises, the economic and social costs associated with higher unemployment rates rise.

Study the graphs illustrating the labor market in action on the top of page 803.

As you read about monopsony at the bottom of p. 803, you might think of a "company town", a small city dominated by one employer. Such an employer will hire fewer workers and will pay them less than a competitively determined wage rate.

When you read about a union with market power, think of the supply curve as shifting to the left. This boosts the equilibrium wage for union members. This is the opposite of what a monopsonistic employer does.

When a big company negotiates with a large union, both sides have power. The result is a wage that is somewhere in between a monopsonistic wage and a union wage.