Engels Law

A Short Note on the Income Elasticity of Demand for Food

This note will briefly look into the relationship between changes in income and changes in demand for food. With respect to Engels law it will briefly comment on what this theorem does and does not imply about the income elasticity of food demand. An attempt will also be made to distinguish quantity and expenditure concepts in this context.

Engels Law

Engels law is based on the observation that there is a limit to the amount that any person can possibly eat so that from a certain level of income onwards demand for food increases by less than income. This implies that food expenditure as a proportion of income decreases. It is worth dwelling on this. Engels law postulates by no means that the absolute amount of food consumed decreases. The absolute amount of food consumed may stay constant, it may decrease or it may increase. So long as it increases more slowly than income it is consistent with Engels law. Assume, that a persons income is initially $100, of which $80 are spend on food and $20 are spend on other items such as water pistols, mousetraps, etc. In other words, 80% of income are spend on food, 20% on other items. Then, in the next period assume that income increases to $200, while prices remain unchanged. Assume further, that the consumer now buys $85 worth of food at unchanged prices, i.e. he buys a larger quantity of food. The rest, an additional $95, are now spend on other items, while prices remain unchanged, i.e. a larger quantity of other items is bought also. The proportion of income spend on other items has now increased from 20% to 100(115/200)=57.5%, while the proportion of income spend on food has fallen from 80% to 100(85/200)=42.5%. This shows that the proportion of income spend on food has fallen in the present example, although the absolute amount has actually risen!

The Engel curve illustrates this relationship, by showing how demand for a commodity changes as income changes if prices remain unchanged. It is worth noting here that because prices are assumed constant, a decrease in expenditure corresponds to a fall in the quantity consumed in this particular case. Although Engels original work was on the relationship

between income levels and expenditure on food as a proportion of income, conclusions on the quantity of food consumed follow so long as the assumption of constant prices holds. The Engel curve -or income consumption curve- illustrates the relationship between income and the quantity consumed, not between income and expenditure. It is worth reiterating then, that a change in quantity can be inferred from a change in expenditure if and only if prices remain constant. Figure 1 shows the total amount of food consumed in an economy at different income levels. Figure 1: f

In figure 1, food consumption is denoted f income levels are indicated by y1. This diagram indicates a case, where food consumption increases as income increases, but it does so by consecutively smaller amounts, so the slope of the curve becomes flatter and flatter as income rises. Of course, the slope of the curve could eventually turn negative, if the consumption of food actually fell beyond a certain level of income. This is a possibility, but it is not a necessary consequence of Engels law.

The Relationship Between Engels Law and the Income Elasticity of Demand

The income elasticity of demand for a product indicates by how much the quantity demanded of a product changes, if income changes. The income elasticity of demand of good F is defined as:

dF F dY Y

dF Y dY F

where dF is the change in the quantity of good F demanded, F is the quantity of good F demanded and, correspondingly Y and dY are income and the change in income respectively. So, in other words, the income elasticity is the ratio of the proportional change in demand of the commodity in question and the proportional change in income. What Engels law postulates is that this elasticity is smaller than one. For 0< <1, the Engel curve would be

positively sloped, as above with continually decreasing increments. (Generally speaking, the Engel curve would of course maintain a positive slope as long as >0.) For =0 it would be

flat, and for <0 it would be negative.

If the income elasticity of demand is either >1, or 0< <1 the good in question is a normal

good, i.e. more of it is consumed if income increases. If the income elasticity is negative ( <0) the good in question is an inferior good, i.e. less of it

is consumed if income increases.

Is Food an Inferior Good? Whether or not food is an inferior good, whether or not the quantity of food demanded falls as income rises is essentially an empirical question. One should however interpret any such result with care. Food is quite a broad category, and contains a mixture of rather different goods, comprising caviar as well as deep fried Mars-Bars. An observed fall in the quantity of overall food consumption could well hide the fact that a smaller amount of higher quality food is consumed. This may well imply that a large number of food products are inferior goods, while some are not. It is plausible, for example, to argue that Lambrusco is an inferior good when compared to say Barolo or even Chianti. As one low quality food commodity is being replaced by another of higher quality, the overall quantity consumed may well fall, in spite of the fact that some of the commodities in the broad category are by no means inferior.

Will Expenditure on an Inferior Good Fall, when the Quantity Consumed Decreases? Not necessarily! This partly depends how a good is defined. If income rises and less of an inferior good is consumed for this reason, overall expenditure in the relevant product category may in principle move either way. Consider the above example again. If consumers drink a smaller amount of Lambrusco and a larger quantity of Barolo, overall expenditure on Wine

may easily increase. If a narrower definition is adopted and Lambrusco on its own is defined as an inferior good, it will of course be more likely that a decrease in the quantity demanded is also accompanied by a fall in expenditure. In general, one should however take care to bear in mind what exactly is included in a product category that is defined as inferior.

Conclusion

To summarise:

Engels law states that demand for food is income inelastic. This means that demand for food rises proportionately less than income, while the absolute amount consumed may change in a number of ways.

Whether or not expenditure on a commodity changes in the same way as demand for this commodity depends on what happens to prices and can depend on how narrowly the product in question is defined.

Note that, when the Engel curve is treated in Microeconomics textbooks, income is often placed on the vertical

axis, demand for the good in question on the horizontal axis. The above curve would then, of course, have an increasing slope.