Engel’s Law Explained

In the mid 19th century, German statistician, Ernst Engel, wrote the following statement:

The poorer is a family, the greater is the proportion of the total outgo [family expenditures] which must be used for food. … The proportion of the outgo used for food, other things being equal is the best measure of the material standard of living of a population.”

From this, the world of economics would be introduced to a brand new concept. One that highlights the relationship, so to speak, between income and food purchases. Named after its creator, the law still holds relevance to this day.

Understanding the theory

Engel’s Law is an economic theory whose origins date back to 1857. It states that the percentage of income specifically for food purchases declines as income increases. When a household’s income rises, the percentage of income going towards food decreases. At the same time, the proportion that purchases other goods, like luxury items, increases.

Similarly, Engel’s Law asserts that lower-income households spend a greater share of their available income on food. This is in stark contrast to households with middle or higher income. When food costs increase, both for food at home (groceries) and away from home (restaurants), the percentage that lower-income households spend could potentially increase.

In today’s popular economics principles, the relationship and significance of household income to food consumption is prevalent. Particularly with population health and improvements to the quality of health being a key factor of all developed markets.

Leaving an impact

Engel’s seminal work was considered to be ahead of its time. However, his theory has an intuitive and deep empirical nature to it. Because of this, it would spark intellectual advancements in the examination of income to food consumption patterns.

For instance, food expenditure makes up a substantial portion of the average budget of the poorer class. This suggests that the poor are also less diverse in their food consumption than the more wealthy consumers. Within the food budget, foods that are cheaper and more starchy (ex. rice, potatoes, and bread) are more predominant for the poor. This often leads to less nutritious – not to mention less diverse – diets.

The curve

The Engel curve is a derivative concept that draws from Engel’s Law. This curve illustrates how the spending on a good differs from household income by either portion or absolute dollar amount. Demographic variables are what typically impact an Engel curve’s shape. These include such things as age, gender, and educational level, along with other characteristics of the consumer.

Additionally, the Engel curve varies for different types of goods. With the x-axis being income level as the y-axis being expenditures, the Engel curves show upward slopes for normal goods. To elaborate, they have a positive income elasticity when it comes to demand. Inferior goods, which have negative income elasticity, depict negative slopes for their Engel curves. In regards to food, the Engel curve is curved downward with a slope that is positive yet also decreasing.

What the theory implies

Two key implications stem from Engel’s Law.

1 – Income elasticity of food demand

Engels’ Law insinuates that the income elasticity of food demand is positive, yet less than 1. Income elasticity of demand measures the overall sensitivity of the demand quantity of a good to every percentage alteration concerning income. Its calculation is by dividing the percentage change in the demand quantity by the percentage change in the patrons’ income.

When a family’s income rises, the spendings on food for that family usually increases simultaneously. This is indicative of a positive relationship between consumers’ income and food demand. Furthermore, it suggests that the income elasticity of food is on the positive side.

However, a food expenditure increase is comparatively slower than the rise in consumers’ income. This results in a significant decrease in proportion. For example, a 40% increase in income will lead to a 25% increase in food spendings. With constant unit prices of food, it supplies a food income elasticity of 0.625 (20%/40%). Therefore, the demand for food proves to be inelastic relative to income.

2 – Engel coefficient

Engel’s Law states that households operating on lower-income tend to spend more of their income on food. That is, the expenditure is larger than the ones coming from a middle-income or high-income level. Generally speaking, food consumption makes up a huge chunk of a poor family’s budget. This is because the rich often put a greater portion of their income towards other items. Notable examples include luxury goods and entertainment.

The theory is applicable to a country-wide scale. It claims that developed countries possessing higher average household income see less income going towards food. This is in stark contrast to developing countries with lower income. The measurement of this statistic was done with the ‘Engel coefficient’. A country’s Engel coefficient describes its status in terms of economics. A decreasing Engel coefficient is typically indicative of economic growth with a growing income level in the country. On the other hand, a rising Engel coefficient signifies a decline in a country’s level of income.

Present-day connotations

  • Speculating well-being from the food budget. According to Engel’s findings that a budget share purchasing food drops with an income increase, economic growth is a solution to malnourishment. Along with this specific growth is rising incomes within the population. Utilizing the Engel coefficient countries can establish national poverty lines. Here, the typical measure is to divide a nutritious diet’s cost by the Engel coefficient.
  • A decrease in the agricultural sector alongside a country increase. Engel’s law insinuates that when a country grows, the agricultural sector comprises a small percentage of the country’s economic activity. This is because the share of income that buys food declines as income itself increases courtesy of economic growth).
  • Agricultural price surge affects the underprivileged. The theory states that food makes up a large portion of the budget of the poor. Therefore, changes in similar prices leave a larger impact on the poor than the wealthy. Policies that boost agricultural prices will cut down on real incomes of the poor. That is to say, they drop proportionately more than they reduce the rich’s incomes.