Definition
Engel’s Law is an economic theory developed by the German statistician Ernst Engel. According to this law, as the income of a family increases, the percentage of income spent on food decreases even though the actual amount spent may rise. This observation highlights the inverse relationship between income and the proportion of income allocated to food, suggesting that food expenditure becomes a smaller fraction of the budget as income levels grow.
Examples
- Low-Income Household: A family earning $20,000 annually spends $5,000 on food, which accounts for 25% of their total income.
- Middle-Income Household: A family earning $50,000 annually spends $8,000 on food, representing 16% of their total income.
- High-Income Household: A family earning $100,000 annually spends $10,000 on food, which equals 10% of their total income.
Frequently Asked Questions (FAQs)
1. What does Engel’s Law state?
Engel’s Law states that as a family’s income increases, the proportion of income spent on food decreases even though the actual amount spent on food might increase.
2. Who formulated Engel’s Law?
Engel’s Law was formulated by 19th-century German statistician Ernst Engel.
3. Does Engel’s Law apply to all goods and services?
No, Engel’s Law specifically addresses the relationship between income and food expenditure. It does not necessarily apply to other categories of goods and services.
4. How does Engel’s Law impact economic policy?
Engel’s Law can impact economic policy by informing governments about consumption patterns among different income groups, which can be useful for developing taxation and subsidy policies.
5. Is Engel’s Law universally accepted?
While widely recognized, Engel’s Law is not without exceptions. It generally holds true across socioeconomic contexts but can vary based on cultural and individual factors.
1. Income Elasticity of Demand: A measure of how much the quantity demanded of a good responds to a change in consumers’ income.
2. Normal Goods: Goods for which demand increases as consumer income rises.
3. Inferior Goods: Goods for which demand decreases as consumer income rises.
4. Budget Share: The fraction of total income allocated to a specific type of expenditure.
5. Consumption Function: A concept that describes the relationship between income and consumption expenditure.
Online References
Suggested Books for Further Studies
- “Principles of Economics” by N. Gregory Mankiw
- “Microeconomics” by Robert S. Pindyck and Daniel L. Rubinfeld
- “The Wealth of Nations” by Adam Smith
- “Development as Freedom” by Amartya Sen
- “The Economics of Food and Agricultural Markets” by Andrew Barkley and Paul W. Barkley
Fundamentals of Engel’s Law: Economics Basics Quiz
### What fundamental observation is described by Engel's Law?
- [ ] As family income rises, the proportion of expenditures on luxury goods increases.
- [ ] As family income rises, the total income spent on non-essential services decreases.
- [x] As family income rises, the proportion of it devoted to expenditures for food declines.
- [ ] As family income rises, the proportion of it devoted to housing increases.
> **Explanation:** Engel's Law states that as families become wealthier, the proportion of income they spend on food declines despite possibly spending more in absolute terms.
### Who formulated Engel's Law?
- [ ] Milton Friedman
- [x] Ernst Engel
- [ ] John Maynard Keynes
- [ ] Adam Smith
> **Explanation:** Engel's Law was formulated by the 19th-century economist Ernst Engel.
### Which of the following best illustrates Engel's Law?
- [ ] A low-income family spends 25% of its budget on food, whereas a high-income family spends 50% of its budget on food.
- [ ] A middle-income family spends the same percentage of its budget on food as a low-income family.
- [x] A middle-income family spends a lower percentage of its budget on food compared to a low-income family.
- [ ] All families spend a fixed percentage of their income on food regardless of income level.
> **Explanation:** According to Engel's Law, higher-income families will spend a lower percentage of their income on food compared to lower-income families.
### How does Engel's Law apply to luxury goods?
- [ ] Luxury goods are inversely related to the portions of food expenditure.
- [ ] There is no relationship between Engel's Law and expenditure on luxury goods.
- [x] Engel's Law focuses on food expenditure and does not make direct claims about luxury goods.
- [ ] The law suggests luxury goods will also take up a smaller proportion of income.
> **Explanation:** Engel's Law specifically deals with the rate at which families spend on food as their income increases, without making direct conclusions about luxury goods.
### Which term refers to the fraction of total income allocated to a specific category of expenditure?
- [x] Budget Share
- [ ] Income Elasticity of Demand
- [ ] Spending Ratio
- [ ] Physical Capital Ratio
> **Explanation:** Budget Share is the term referring to the fraction of total income allocated to a specific type of expenditure.
### What does higher income lead to according to Engel's Law?
- [ ] Higher percentage spent on food.
- [x] Lower percentage spent on food.
- [ ] Stable percentage spent on food.
- [ ] No change in food expenditure habits.
> **Explanation:** According to Engel's Law, higher income results in a lower percentage of income being spent on food.
### Does Engel's Law claim that total food expenditure decreases with rising income?
- [ ] Yes, it decreases in both absolute and percentage terms.
- [x] No, total expenditure on food may rise, but the proportion of income spent on food decreases.
- [ ] Total food expenditure remains the same.
- [ ] Total food expenditure scales linearly with income.
> **Explanation:** Engel's Law posits that while total food expenditure can increase with rising income, the proportion of income spent on food decreases.
### What does the term "inferior goods" mean in economic context?
- [ ] Goods for which demand increases as income rises.
- [ ] Goods that are of lower quality.
- [ ] Goods for which demand stays constant over different income levels.
- [x] Goods for which demand decreases as income rises.
> **Explanation:** Inferior goods are those for which demand decreases as consumer income increases, representing the opposite tendency described by Engel's Law for food expenditures.
### What is an example of Engel's Law in a high-income household?
- [ ] The household spends the majority of its increased income on food.
- [x] The proportion of income spent on food is lower despite higher absolute food expenditures.
- [ ] The household spends less in absolute terms on food.
- [ ] Food expenditures remain unaffected by income changes.
> **Explanation:** The proportion of income spent on food decreases for high-income households, even if the absolute amount spent on food increases.
### How does Engel's Law relate to the concept of income elasticity in developing countries?
- [ ] High-income elasticity would indicate Engel's Law does not apply.
- [ ] Income elasticity and Engel's Law are essentially unrelated.
- [x] Engel's Law is observed as developing countries allocate decreasing proportions of income to food as they grow wealthier.
- [ ] Income elasticity is the same in developing and developed countries.
> **Explanation:** Engel's Law suggests that as developing countries get wealthier, the proportion of household income allocated to food decreases, indicating a kind of income elasticity.
Thank you for exploring the intricacies of Engel’s Law and testing your knowledge with our quiz. Keep broadening your economic understanding!
