Engels law

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The genesis of Engel’s law creation

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.

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 Productions- und Consumption Verhältnisse Königreichs Sachsen". 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.

The main postulates of Engel’s law

The main postulate was that the consumer spends the less money on food the more he earns. However, this was only one of Engel's four main postulates, which stated that when consumer income increases

1. The percentage of spending on food decreases
2. There is no change in the level of spending on fuel, housing, and lighting
3. Expenditure on clothing remains normal
4. 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 PECENTAGES of total income spent for the various categories change in the following ways

1. Spending on food decreases
2. Expenditures related to home and household work remain at similar levels
3. 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.

References

• Benjamin S. Loeb, [1],The use of Engel's laws as a basis for predicting consumer expenditures, Journal of Marketing. Jul1955, Vol. 20 Issue 1, p20-37. 8p, Columbia University
• Lewis, H. Gregg and Paul H. Douglas, Studies in Consumer Expenditures (1901, 1918-19, 1922-24), Supplement to Journal of Business, October 1947, p. 1.
• Stigler, George J.,The Early History of Empirical Studies of Consumer Behavior, The Journal of Political Economy, Vol. LXII, No. g, p. 96.
• Wyand, Charles S.,The Economics of Consumption (New York: The Macmillan Company, 1938), pp. 280-21.

Author: Paweł Słomka