Engel's law

Engel's law
See also

Engel's law - as the average income per one member of the household increases, not only the general demand increases, but also its structure changes. These changes are expressed by reducing the percentage share of all expenditure on food and other lower-order goods, and increasing expenditures on higher-order goods.

The name of this economic right comes from the name of the German economist Ernest Engl. The researcher published a work titled Die Productions- und Consumptionsverhaeltnisse des Koenigsreichs Sachsen in 1857, in which he included an analysis of the structure of household expenditure depending on the income earned. He is also the creator of the Engel's curve, which is a graphical depiction of the relationship between income earned by consumers and the amount of goods consumed by them. Ernest Engel was one of the largest statistics organizers in Germany. He defined statistics as a science that is able to present the general state. On the one hand, he regarded her as an independent field of science, on the other he claimed that it is only a method aimed at serving and helping all other sciences. He hoped that the statistics would be applicable in all administrative branches. Engel was also one of the founders of the International Statistical Congress.

II Engel's Law

Engel's Second Law - expenditures for luxury goods or savings appear only when the household reaches a high income, which exceeds all basic needs. Willingness and propensity to purchase luxury goods only appears when the rational costs of satisfying basic needs do not exceed 80 percent of all income earned by the consumer, the remaining 20 percent of income is the so-called fund of free decisions.

Division of goods

  • Higher goods - the increase in demand is related to the increase in household income. They are usually permanent items of consumption, such as electronic equipment, furniture, refrigerators or cars. These goods are characterized by a factor of income elasticity of demand greater than 1.
  • Lower-order goods (basic) - all kinds of food products, the purchase of which is necessary for every human being. The demand for it decreases with the increase in income, or grows less than proportionally in relation to income. Lower-order goods are characterized by a negative income elasticity of demand.

Engel curves

In his research, Ernest Engel noticed the relationship between income growth and an increase in demand for basic goods and higher-order goods. These dependencies can be perfectly illustrated using Engel curves. It is clear from them that the increase in income for both these goods is the same, but for basic goods, the increase in purchases decreases, and for higher goods, the increase in purchases increases. Therefore, it can be concluded that with the increase in income, the consumer is willing to spend a relatively larger amount of money for higher-order goods, while less spending on basic goods. Consumers may react differently to changing the level of income, both those that constitute their main source of income and the other, constituting a smaller part. The change in regular income often after some time results in a change in the structure of purchases made and the level and lifestyle of the consumer. Changes in other income may lengthen or shorten the period of these changes depending on favorable or unfavorable factors.

Engel's law and the standard of living of society

Engel's law applies only to middle-income families and is not translated into families or societies that are extremely poor or extremely rich.

  1. In families, which can be described as extremely poor, with a very low level of satisfying all needs (including the most basic ones as nutrition), the increase in income is primarily intended for lower-level goods, thanks to which survival is possible. Then there is an increase in demand for food goods and it is relatively faster than for higher-order goods. As a result, food expenditure is growing not only in absolute terms, but also in relative terms.
  2. In the case of extremely rich families, the increase in income is not allocated to satisfying nutritional needs, because their saturation level is already very high. It is even possible that, with an increase in income, there will be a fall in expenditure on food products, in the absolute sense, due to the allocation of expenses for the purchase of luxury goods.

In connection with the above, one can formulate a thesis that, according to Engel's law, it will claim that the standard of living of the family (or society) is higher, the smaller the percentage share of expenditures on basic goods. In a society characterized by high incomes, consumers spend relatively much more on higher-order goods, and definitely less on basic goods. In low-income societies, the opposite is true.

References