Engels law
Engel's law owes its existence to none other than the author whose name it bears. The phrase was first used in the author Ernest Engel's 1857 publication called, Die vorherrschenden Gewerbszweige in den Gerichtsämtern mit Beziehung auf die Productionsund Consumtionsverhältnisse des Königreichs Sachsen (Engel, E., 2021). This work was based on a comparative analysis of the expenditures of individual households in relation to their income. As noted by authors Lewis and Douglas and Stingler, Engel's analysis merely included parameters related to consumer spending on food items only. As the number of market consumers increased, statisticians began to consider developing more and more pertinent tools to analyze and track consumer behavior. For this reason, interest in the so-called Engel's law grew.
The main postulates of Engel’s law
The main postulate was that the consumer spends the less money on food the more he/she earns. However, this was only one of Engel's four main postulates, which stated that when consumer income increases (Wyand, C. S., 1938)
- The percentage of spending on food decreases
- There is no change in the level of spending on fuel, housing, and lighting
- Expenditure on clothing remains normal
- There is a significant increase in expenses related to increasing the comfort of life such as healthcare, education, and entertainment.
Modernized version of Engel’s law
With the development of statistics and wider access to more and better data, the formulation of Engel's law has also changed. It is now said that "As the income of families increases, the dollars they spend for each important category of expenditure also rises, but the percentages of total income spent for the various categories change in the following ways (Vaile, R. S., 1952)
- Spending on food decreases
- Expenditures related to home and household work remain at similar levels
- Expenditures related to transportation, entertainment, education as well as health care are increasing. In addition, an increased amount of accumulated savings is observed
Nowadays, Engel's law is much more often interpreted with reference to the latter, slightly renewed and truncated version. It is also important to note that the data used in Engel's study are very static and refer to consumer spending in real time when they are paid more.
Engel’s law application
Engel's law can be mainy used in predicting consumer trends. For this law to be considered accurate in forecasting such phenomena, it should be applied with te small correction. To analyze changes in consumer behavior in the right way the test should incude the comparison of the data between periods of time when their wages increase. This means that Engel's law must meet its fundamental condition, which is that if a consumer's income increases over time, his expenditures on food should decrease disproportionately, while those related to leisure and somewhat looser areas of life should increase. The inverse relationship associated with receiving less income at a given time should, of course, cause the opposite phenomenon.
Is Engel's law up to date?
The dynamic changes taking place in society today mean that Engel's Law is no longer so accurate. This is due to the emergence of newer and newer variables influencing consumers' purchasing behavior, which is now dependent on many more variables than just their income. Nevertheless, the value of money and its quantity was the basis for observing consumer behavior.
| Engels law — recommended articles |
| Engel's law — Cyclic variation — Disposable personal income — Gold-silver ratio — Net pay — Net cost — Consumption function — Autonomous consumption — Property assessment |
References
- Engel, E. (2021). Die vorherrschenden Gewerbszweige in den Gerichtsämtern mit Beziehung auf die Productions-und Consumtionsverhältnisse des Königreichs Sachsen, WISTA-Wirtschaft und Statistik, 73(2), p. 126-136.
- Gregg, L. H. and Douglas, P. H. (1947) Studies in Consumer Expenditures, Supplement to Journal of Business, p. 1.
- Johnson, R. M. (1937). Wyand Charles S. The economics of consumption. Journal of Social Philosophy and Jurisprudence, 3(a) p. 280-21.
- Loeb, B. S. (1995). The use of Engel's laws as a basis for predicting consumer expenditures, Journal of Marketing, Columbia University, Vol. 20 Issue 1, p. 20-37. 8p.
- Stigler, G. J. (1954). The Early History of Empirical Studies of Consumer Behavior, The Journal of Political Economy, Vol. LXII, No. g, p. 96.
- Vaile, R. S. (1952). Marketing in the American economy, Ronald Press Co.
- Wyand, C. S.The Economics of Consumption (New York: The Macmillan Company) p. 280-21.
Author: Paweł Słomka
