Engel's Law - Explained
What is Engel's Law?
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What is Engel's Law?
Engel's law, being an economic theory, was founded by a German statistician named Ernst Engel in the year 1875. According to this theory, with the increase in income levels, there is a decrease in the extent of income apportioned for buying food. With the increase in income of a household, the proportion of income incurred on food expenses reduces and the proportion of income spent on expensive products such as luxury cars rises.
- For instance, Mr. A earns $50,000, and spends 1/4th of his income, that is $12,500 on food. When there is an increase in income to $100,000, it doesn't imply that he will spend twice the amount ($50,000) they previously spent on food. However, he will start spending for other things in order to improve his lifestyle.
Back to:ECONOMIC ANALYSIS & MONETARY POLICY
Why is Engel's Law Important?
Engel's law says that people with lower income shell more percentage of their given income levels on food as compared to people with middle or high-income levels. When there is a rise in food costs including groceries and at restaurants, the lower-income people tend to spend more percentage of their income.
Even today, economics considers the relationship and link between the consumption of food and income levels of people. It can specifically be related with the healthy lifestyle of people and offering them an improved quality of products so as to foster their well-being. The essence of intuition offered by Engel's law paved the path for having in-depth knowledge about the relationship between income levels and food consumption.
- Total utility
- Marginal Utility
- Diminishing Marginal Utility
- Marginal Utility per Dollar
- Rule of Maximizing Utility
- Consumer Goods
- Changes in Income Affect Consumer Choices
- Changes in Price Affect Consumer Choices
- Substitution Effect
- Income Effect
- Budget Constraints Create Demand Curves
- Lifecycle Model of Consumption
- Autonomous Consumption
- Permanent Income Hypothesis
- Lipstick Effect
- Engel's Law
- Paradox of Thrift
- Ricardo Barro Effect
- Consumer Confidence Index
- The Wealth Effect
- Behavioral Economics