Role of economic theory In reality, an unlimited number of factors change over time, and could affect labor supply Economic theory helps isolate a small set of variables that are important influences on behavior
6 Role of economic theory • In reality, an unlimited number of factors change over time, and could affect labor supply. • Economic theory helps isolate a small set of variables that are important influences on behavior
Role of economic theory Theory would suggest that person maximizes utility -and would include factors like the persons own wage rate Theory is often too simple -may ignore important considerations. But whole point of model building is to reduce a problem to its essentials
7 Role of economic theory • Theory would suggest that person maximizes utility -- and would include factors like the person’s own wage rate. • Theory is often too simple – may ignore important considerations. But whole point of model building is to reduce a problem to its essentials