Engel’s Law

Updated on January 28, 2024
Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What Is The Engel’s Law?

Engel’s law in economics is a theory that states that as income rises, the percentage of income spent on the consumption of food decreases. The law establishes the relationship between family income and expenditure. Ernst Engel proposed the theory in 1857, which remains relevant even in modern circumstances.

Engel's Law

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Engel’s law is applicable at the household and national levels. It informs about the living standards of people in a region. Focus on income, expenditure, and especially consumption patterns can help the government decide on the appropriate economic policies for the well-being of the people.

Key Takeaways

  • Engel’s law is an essential concept in economics, according to which people spend proportionately less on food as their income rises.
  • By proportion, we mean the expenditure on food consumption as a percentage of the income. Hence, the decrease in percentage is due to the increase in income and not a fall in actual expenditure.
  • Engel’s law gives valuable insight into the living standards of citizens of a country.
  • Engel’s law graph, or the Engel curve, is an equally important and widely-studied concept. It can represent the relationship between income and expenditure for normal and inferior goods on the curve.

Engel’s Law Of Consumption Explained

Engel’s law of family expenditure is a critical concept in economics that sheds light on the quality of life of people in an area. Though it was established in the mid-nineteenth century, one and a half centuries later, it is still applicable and constant developments, in theory, are taking place.

Studying the proportionate division of family income and expenditure is significant at a personal and national level. It can help plan finances and implement necessary economic policies to improve living standards.

Engel claimed that the percentage or proportional expenditure on food decreases as household income rises. Although it is to be noted that the expenditure in absolute terms doesn’t decrease, the expenditure as a percentage of total income declines.

This means that poorer households spend most of their income on food consumption compared to middle and high-income households.

Now let’s look at some associated sub-theories drawn from Engel’s law.

  1. People spend more on normal or luxury goods as income rises. Once the psychological and safety needs are fulfilled, more money is left to fulfill esteem needs.
  2. The expenditure on inferior goods decreases. Thus, the demand for Giffen goods falls as people have more disposable income.
  3. Within the food expenditure, poorer households are more likely to spend on less-fibrous and more starchy diets. This is due to the high price of nutritious food items.

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Engel Curve

Engel curve or Engel’s law graph is based on the relationship between household income and expenditure. The curve can also be defined as the locus of all the points representing the quantities of various goods demanded at different income levels.

The curve is different for normal and inferior goods. For example, consider the graph given below.

Engel Curve

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People tend to buy normal goods more as their income rises. This is because after fulfilling basic requirements, the additional income facilitates people to buy other goods which are not necessities. For example, a person can buy an extra pair of shirts or a new mobile phone.

Thus, the quantity of normal goods purchased is directly proportional to the rise in income. Consequently, the graph is a straight line passing through the origin. In this context, luxury items can also be considered normal goods, as anything above what is necessary is a luxury.

On the other hand, when people have more money, the probability of buying an inferior good is lesser. Hence, the quantity of inferior goods purchased is inversely proportional to the increase in income. Therefore, the graph shows a straight line with a negative slope.

Example

Let’s consider a hypothetical example of a family of four – a couple and their two kids. Until 2021, the couple received a monthly salary of $12,000. They spent around 5% of their monthly income, or $600, on food.

At the beginning of 2022, the couple received a total increment of $500 per month. But their expenditure on food remained the same. After that, however, the percentage expenditure on food decreased to 4.8%.

The couple decided to set aside the increment amount of six months and remodel their home theatre with savings of $3000.

Frequently Asked Questions (FAQs)

1. What is Engel’s law in economics?

Engel’s law of family expenditure states that as net family income rises, the proportion or percentage of expenditure on food decreases. However, the absolute expenditure, i.e., in dollar terms, remains the same. Further, the expenditure on luxury goods increases. On the other hand, the expenditure on inferior goods decreases. The theory shows that poorer families spend most of their income on food, especially less nutritious items.

2. Why is Engel’s law important?

The law of consumption put forward by Engel is relevant both from a personal (or household) and economic perspective. Studying the division of family income and expenditure can help the government lay out economic policies that improve the living standards of citizens.

3. When was Engel’s law introduced?

Ernst Engel, a German statistician, proposed Engel’s law in 1857. However, other economists have added and researched many sub-theories, making Engel’s law still pertinent today.

This article has been a guide to what is Engel’s Law of Consumption. Here, we explain the concept along with its curve, and an example. You may also find some useful articles here –

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