Engel’s Law

Engel’s law a significant aspect of economics literature and is mainly used in consumer behaviour theories. Engel’s Law defined by Ernst Engel states that as incomes increases, the proportion of income spent on consumption reduces. Engel’s Law can be identified as a fundamental principle of income and consumption theory.

Engel’s Law states that as income rises, the percentage of income spent on consumption rises slower as compared to a rise in income. Engel’s Law is explained well with the concept of the Engel curve. Engel’s curve represents a relation between quantity demanded and income. In simple terms, Engel’s curve depicts the relationship between amounts of the quantity of any product demanded by consumers and their income. Engel curve shows a positive relationship, as income rises, quantity demanded also rises.

Engel’s curve can be represented graphically. Engel’s curve is represented in the first-quadrant of the Cartesian coordinate system. Income is measured on Y-axis and quantity demanded is measured on X-axis. In the case of normal goods, the goods that follow the law of demand, the Engel curve has a positive slope. In the case of inferior goods, the slope of the Engel curve is negative. Economic interpretation can be explained as when consumers have more income they spend less money on buying inferior goods as the same amount of money can fetch them some better goods. Goods that are represented by Marshallian demand function and produce utility in Gorman polar form have an Engel curve with a constant slope.

Use of Engel’s Law in Economics

Engel’s Law widely finds its use in prediction of consumer expenditure. Rising income and “unrestricted spending activity” possessed by masses had led to the development of tools that can predict consumer expenditure. There are several prepositions that are used in Engel’s Law when income increases:

• Percentage of income spend on consumption decreases
• Percentage of income used for rent, fuel, electricity usage always tends to be constant.
• Percentage of income paid for purchasing clothes also remains the same
• There is a rapid increase in the percentage of income spent on education, health, luxury and recreation.

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