Engel curves help modern economists explore the fluctuations in demand as a function of income.
Ernst Engel
Ernst Engel is from a nation that is generally considered to be the most pedantic and meticulous in Europe. In his studies he was a statistician, an economist and partly a sociologist. Passion for these sciences allowed him not only to make a significant contribution to the development of statistical science, but also to discover patterns of consumption depending on family income, which gave grounds to build Engel curves. It should be noted that the Prussian scientist, holding the post of director of the statistical office in Berlin, was more of a practitioner than a theorist. Therefore, the law and the Engel curve appeared empirically, as a result of a long study of the contents of the budgets of poor working families and representatives of more prosperous classes. Although Ernst did not use graphs in his works, the functions built by modern economists on the basis of his law are called "Engel curves".
Engel types of goods
Exploring the spending of families with different levelsincome, Engel conditionally divided all goods into three groups. To the first he attributed the essentials, often of low quality and inexpensive. As income rises, the demand for these goods falls, that is, consumers replace them with better ones. The second group of goods includes goods whose consumption does not change or increases with income growth. These are high-quality products that everyone needs for a normal existence, regardless of the well-being of the family. For example, vegetables and fruits, cereals, milk and so on. To the third group of goods, which received the conditional name of luxury goods, he included goods that can be dispensed with, but at the same time they have an important status value, emphasizing the position of a person or family in society. As they say, they are greeted by clothes…
Income elasticity of demand
So, when determining the degree of influence of income on the demand for certain types of goods and services in the modern economy, Engel curves are used. It is a measure of the income elasticity of demand for a particular good. That is, we will be able to find out how much the demand for certain types of goods changes depending on changes in the income of consumers. The Engel curve shows a positive elasticity of demand with an increase in income for luxury goods and a negative one for low-quality goods. High-quality goods are distinguished, which are necessary for the normal life of the family, the elasticity of which is very small. Bearing in mind the above patterns, the manufacturer plans what product to create and what segment of the population to count on.
Plotting the Engel curve
In order to build the Engel curve, it is necessary to take the horizontal axis of coordinates under the level of the family's well-being and its consumer abilities, and the vertical one - under the value of the amount of goods purchased. If we are dealing with an income inelastic product, that is, high-quality essentials, then the curve will be quite flat. This means that the quantity of goods will not increase in proportion to the growth of income. After all, a family that consumes two loaves every day will not eat more bread, even if its well-being increases. The indicator of expenses of the increasing budget of the growing rich family on luxury goods will grow upwards and quite confidently. The low-quality goods curve rises to a certain extent, until the income of the family reaches the point where it becomes possible to replace low-quality goods with good ones. Then the curve starts to fall. Thus, Engel curves show different consumer behavior regarding certain types of goods, depending on the income received.
The significance of Engel's research
Of course, Engel's law has its exceptions and cannot claim categorical conditions for any consumer. There are quite rich people who prefer to live very modestly, regardless of how much they earn. And yet, the Engel curve shows the pattern of growth in demand for a particular type of product, depending on increasing or decreasing income.consumers as an average, as a model of behavior for the majority. Its use allows predicting the development of certain sectors of the economy and changes in demand for goods. At the same time, Engel deduced a formula by which the poverty level of a family is determined. If more than half of the income of the family budget goes to food, then we can confidently talk about her low standard of living. In addition, he was able to reasonably prove that poor families, taking care of daily food, do not spend money and energy on their own spiritual development, which significantly reduces their chances in life in general.
