Economics essay

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ASSIGNMENT
School of Sport & Exercise Sciences
12PSC046
Sports Economics Assignment
Academic Year 2012/2013
Semester 2

Section 1

Income-leisure trade off

The income trade off model is a simple model used to ‘explore the dilemma faced by individuals between working to earn income and consuming time as leisure’ (Downward P, Dawson A, and Dejonghe T, 2008). Individuals choose the leisure and work combination that best matches their preferences between satisfaction derived from goods bought through income and that generated by the availability of non-work time (Blyton, P, Hassard, J, Hill, S, & Starkey, K. 1989). One of the motives for the decision making process made by the individual is based around their personal preferences on what maximum utility is. Downward, Dawson, and Dejonghe (2008) state that ‘individuals seek to maximise their utility through the consumption of goods and services or enjoying leisure time.’ This can be defined through the use of a simple equation:

U=U(I,L)

‘U’ indicates the level of utility, ‘I’ indicates the income of the individual, and ‘L’ indicates the leisure time of the person. An individual can express preferences over leisure and income but will have difficulty in explaining why they have those preferences between the two. Both income and leisure are ‘normal goods’. Individuals prefer to have more of both leisure and income than less, and an individual will be willing to substitute more of one for less of the other which is explained by the law of diminishing margins. This implies that ‘relatively abundant goods or services are of less value to the individual compared with relatively scarce goods or services’ (Downward P, Dawson A, and Dejonghe T, 2008). Utility is represented by an indifference curve on the income-leisure tradeoff model.

However, income acts as a constraint to the individual as it limits the amount of leisure or goods that can be consumed. The constraint is represented by a straight line which indicates maximum time in a day (24Hours) and maximum income of the individual. If an individual is earning an income then they cannot participate in leisure, and hence, time (T) is a constraint, and the ‘wage (w)’ from work (W), puts a constraint on the amount that the individual can spend on consumer goods to raise his/her utility. ‘The wage rate is the opportunity cost of leisure’ (Downward, P., Dawson, A., & Dejonghe, T, 2008). This can be expressed as an equation where total time equals work + leisure:

T = W + L

And Income equals wage x working hours

I = wW

‘Since people are paid different wage rates, they will face different income- leisure tradeoffs. An hour of leisure is “more expensive to someone who earns £100 per hour than to someone with a wage of £20 per hour’ (Hall & Lieberman, 2009). This means that the desire to consume both income and leisure becomes constrained when the consumer tries to maximise utility. The equation ‘income is equal to the wage x by time – leisure’ shows how much an individual can earn in one day when leisure time is taken away from the total time in the day (24hours)

I = w(T-L)

This graph (Fig.1) represents a basic income leisure trade off where the indifference curve represents Utility (U), the straight line represents the constraint, and where the two points intercept represents that equilibrium or ‘maximum utility’. Clearly identified on the graph is the split between work and leisure in one day which the represents the income earned. This work/leisure split is, according to the model, the ideal amount in order to achieve maximum utility for this example.

Fig. 1- Income/leisure tradeoff model

So how can the leisure income tradeoff model be used to predict sports participation? Despite it being hard to see a link between the model and sports participation levels, the model can be used as a basis to make predictions. For people with a higher income or socioeconomic background, a higher wage
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