Engel's law: if a family's income doubles, does its spending on food double too?
A family with a monthly income of 6 million soum spends half of it on food, while a family with 24 million soum spends only a quarter. The amount spent on food rises, but more slowly than income. This is Engel's law, observed in the 19th century. Its cause, how it is measured, its limitations and a practical conclusion for a neighbourhood shop owner.
When a salary goes up, a person does not eat twice as much bread. This simple observation lies at the heart of one of the oldest empirical regularities in economics, and it is still used today to assess the well-being of the population.
Key rules
- What the law says. As a family's income rises, the amount spent on food usually rises too, but more slowly than income. As a result, the share of food in the family budget falls
- Who identified it. The regularity was described by the German statistician Ernst Engel in 1857 after analysing household budget data, which is why it is called Engel's law
- Why is this so? The need for food has a natural limit. As income grows, the extra money goes more to housing, education, health, transport, leisure and savings
- In the language of elasticity. The income elasticity of demand for food is greater than 0 but less than 1: if income rises by 1 percent, spending on food rises by less than 1 percent. Such goods are called necessities
- Engel coefficient. The share of food spending in the family budget. The lower it is, the better off the family is considered to be, which is why this share is used to compare the well-being of countries and regions
- Limitations. The share is affected not only by income but also by changes in food prices relative to other prices, the number of people in the family and the habit of eating at home or out. So different years or regions should be compared using figures calculated by the same method
- What it means for business. In a region where incomes are growing, ordinary food sales grow more slowly than household income, while demand for services and non-food goods may grow faster
Example: three families and a neighbourhood shop
Hypothetical figures, compiled by the author (monthly, million soum):
| Family | Income | Spending on food | Share of food |
|---|---|---|---|
| The Rahimovs | 6 | 3.0 | 50% |
| The Yusupovs | 12 | 4.2 | 35% |
| The Sobirovs | 24 | 6.0 | 25% |
The Yusupovs' income is 100% higher than the Rahimovs', while their food spending is 4.2 / 3.0 − 1 = 40% higher. The income elasticity is about 40 / 100 = 0.4. Between the Sobirovs and the Yusupovs: income is again 100% higher, food spending 6.0 / 4.2 − 1 ≈ 42.9% higher, elasticity about 0.43.
Oybek, the owner of a neighbourhood shop, used this logic to make a plan. If household incomes in the neighbourhood rise by 20% in a year and the elasticity is around 0.4, food spending rises by about 0.4 × 20% = 8%. For example, if the Yusupovs' income reaches 14.4 million soum, their food spending will be 4.2 × 1.08 ≈ 4.54 million soum, and its share will fall from 35% to about 31.5%.
Oybek's conclusion: selling only bread, flour and cooking oil, you cannot grow along with income. He set aside part of the shelves for household chemicals and children's goods and added a home delivery service: when income rises, families spend more money on exactly such goods and services. This is an assumption, not a guarantee: Oybek will check it every quarter against the structure of his sales.
Test yourself
5 questions on this topic: pick an option or reveal the answer.
A hypothetical country's real GDP is growing steadily by 7% a year. According to the "rule of 70", in approximately how many years will real GDP double?
In the simple Keynesian model (taxes and imports are ignored), the marginal propensity to consume is 0.8. If investment increases by 20 bln units, by how much does aggregate income increase through the multiplier effect?
Last year a family spent 540 thousand soums on consumption out of an income of 700 thousand; this year it spent 600 thousand out of an income of 800 thousand soums (hypothetical). What is this year's average propensity to consume (APC = consumption / income)?
In economic theory each factor of production brings income to its owner. What is the income received by the owner of the land (natural resource) factor called?
When the real income of a city's population rose by 10%, the quantity demanded of taxi services rose by 15% (prices unchanged). What is the income elasticity of demand, and what type of good is this service?
Answered: 0 / 50 of 5 correct
All tests →See also
Sources
- Fundamentals of economic theory (general concepts) · Engel's law: as income rises, food spending rises in absolute terms but its share in the budget falls; described by the German statistician Ernst Engel in 1857 on the basis of household budget data; the income elasticity of demand for food is greater than 0 and less than 1; the Engel coefficient (share of food spending in the budget) is used as an indicator of well-being; general knowledge
- Encyclopaedia Britannica: Ernst Engel · German statistician (1821–1896), author of Engel's law, which states that poorer families spend a larger share of their income on food
- Example, families, income and spending amounts, calculations · compiled by the author, hypothetical