Useful Notes on Engel’s Expenditure Curve for Inferior and Luxury Goods

Engel curve explains the relation between the income level and the quantity of a commodity purchased, while the Engel expenditure curve relates income to expenditure on the commodity purchased.

Economists are often interested in conducting family expenditure surveys to determine the expenditure behaviour of the households. Engel expenditure curves serves as a useful device in all such studies.

An Engel expenditure curve is illustrated in Fig. 5.41, where the income level is shown along the y-axis and the corresponding expenditure is represented on the X-axis. In case this curve happens to coincide with the 45° line from the origin, the consumer spends his entire income on the commodity ‘X’ or a group of commodities taken on the X-axis.

The Engel expenditure curve cannot lie below this line, since normally it is not possible for a consumer to incur expenditure more than the income. As the consumer has to save a part of this income for various contingencies or speculations, thus, the actual Engel expenditure curve lies above the 45° line.

At extremely low levels of income, people spend a very large proportion of their income on necessities of life particularly food. With rise in the income of the consumer, expenditure on food increases, but the proportion of expenditure on food declines.

Since this sort of behaviour of the consumer was first observed by Ernst Engel, it has come to be known as Engel’s law. Fig. 5.41(a) illustrates the Engel curve for food. At a low level of income OY₁ or BE₁, consumer spends only OE, equal to F₁E₁ on food and there is a saving of BF₁.

When the income level rises to OY₂ or CE₂, the expenditure of the consumer increases to OE₂ equal to F₂E₂, the saving increases to CF₂. Further, when the income goes up to OY₃ or OE₃, the expenditure of the consumer on food becomes OE₃ equal to F₃E₃ and hence there is saving of DF₃, which is still higher than CF₂.

We observe that with increase in the income of the consumer, though the expenditure on food rises in absolute terms, it declines in percentage terms. As a result, the Engel Expenditure curve diverges more and more from the 45° line, as income increases.

If an Engel expenditure curve is drawn for luxury commodities, we observe that the expendi­ture rises more than proportionately to rise in income at higher income levels (Fig. 5.41(b). On the other hand, Engel expenditure curve for inferior commodities declines, as income rises (Fig. 5.41(c)).