Definition of Engel’s law
What is Engel’s Law
Engel’s Law is an economic theory introduced in 1857 by Ernst Engel, a German statistician, stating that the percentage of income spent on food purchases decreases as income increases. As a household’s income increases, the percentage of income spent on food decreases while the proportion spent on other goods (such as luxury goods) increases.
Key points to remember
- Engel’s Law is a 19th century observation that as household income increases, the percentage of that income spent on food decreases on a relative basis.
- Indeed, the quantity and quality of food that a family can consume in a week or a month are quite limited in price and quantity.
- As food consumption decreases, luxury consumption and savings in turn increase.
Understanding Engel’s Law
In the middle of the 19th century, Ernst Engel wrote: “The poorer a family, the greater the proportion of its total expenditure that must be devoted to food.” This was then extended to entire countries by arguing that the richer a country, the smaller the food share.
Engel’s law similarly states that low-income households spend a greater proportion of their disposable income on food than middle- or high-income households. As the cost of food increases, both for food in the home (such as grocery shopping) and food out (eg, in a restaurant), the percentage spent by low-income households is expected to increase.
The relationship and importance of household income with food consumption is well anchored in the principles of today’s popular economy, especially with the health of the population and the improvement of the quality of health, an important rallying point for all developed markets.
The very poor can spend up to half of their income on food, so their budgets can be considered food intensive or specialized.
Engel’s founding work was a bit ahead of its time at the time. However, the intuitive and profound empirical nature of Engel’s Law helped trigger intellectual leaps in the study of income in relation to patterns of food consumption. For example, since food expenditure represents a larger share of the budget of the poor, this implies that the poor are also less diversified in their food consumption than those of more affluent consumers. Likewise, in the food budget, cheaper and more starchy foods (such as rice, potatoes and bread) are likely to be predominant for the poor, leading to less nutritious and less diverse diets. .
For example, a family that spends 25% of its income on food with an income of $ 50,000 will pay $ 12,500 on food. If their income increases to $ 100,000, it is unlikely that they will spend $ 25,000 (25%) on food, but will spend a lower percentage while increasing their spending in other areas.