Engel's curves help modern economists to investigate fluctuations in the size of demand depending on income.
Ernst Engel
Ernst Engel is the representative of the nation, which, according to the generally accepted opinion, is considered the most pedantic and scrupulous in Europe. In his studies he was an extrasist, an economist and in part a sociologist. The fascination with these sciences allowed him not only to make a significant contribution to the development of statistical science, but also to discover the patterns of consumption depending on the income of families, which gave grounds for constructing Engel curves. It should be noted that the Prussian scientist, who was the director of the Bureau of Statistics in Berlin, was more of a practitioner than a theoretician. Therefore, the law and the Engel curve appeared empirically, as a result of a lengthy study of the content of the budgets of poor working families and representatives of the more prosperous classes. Although Ernst did not use graphics in his works, nevertheless the functions built by modern economists on the basis of his law were called "Engel Curves".
Types of goods by Engel
Investigating the expenses of families with different levels of income, Engel conditionally divided all the goods into three groups. To the first, he took the essentials, often low-quality and inexpensive. With the growth of income, the demand for these goods falls, that is, consumers replace them with better ones. The second group of benefits includes goods whose consumption does not change or increases with income growth. This is a quality product 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 conventional name of luxury goods, he referred the goods that can be dispensed with, but at the same time they have important status significance, emphasizing the occupied position of the person or family in society. As they say, they meet on clothes ...
Elasticity of demand depending on income
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. This is an indicator of the elasticity of demand for a certain product by income. That is, we will be able to find out how much the demand for certain types of goods varies, 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 - for low-quality goods. High-quality goods are identified, which are necessary for the normal life of the family, the elasticity of which is very small. Bearing in mind the stated regularities, the producer plans what kind of goods it is necessary to create and on which layer of the population in this case to count.
Construction of the Engel curve
In order to build the Engel curve, it is necessary to assign the horizontal axis of coordinates to the level of the family's well-being and its consumer abilities, and the vertical axis to the value of the quantity of purchased goods. If we are dealing with inelastic goods in terms of income, that is, quality necessities, 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, the family, consuming two loaves daily, will not eat more bread, even if its well-being grows. The exponent of the growing budget of a wealthy family for luxury goods will grow upward and confident enough. The curve of low-quality goods grows to a certain extent, until the family's income reaches the point when it becomes possible to replace low-quality goods with good quality goods. Then the curve begins to fall. Thus, Engel curves show the different behavior of the consumer relative to individual types of goods depending on the income received.
The significance of Engel's research
Of course, Engel's law has its exceptions and can not claim categorical conditions for any consumer. There are enough rich people who prefer to live very modestly regardless of how much they earn. And yet, Engel's curve shows the pattern of growth in demand for a particular type of commodity, depending on the increasing or decreasing income of consumers as an average value, as a model of behavior for the majority. Its use makes it possible to predict the development of various sectors of the economy and the change in demand for goods. At the same time, Engel derived a formula that determines the poverty level of the family. If more than half the income of the family budget goes to food, then you can confidently talk about the low level of her life. In addition, he was able to argue reasonably that poor families, daily worrying about their daily living, do not spend money and energy on their own spiritual development, which significantly reduces their chances in life as a whole.