Engel’s law is named after statistician Ernst Engel (1821-1896): his observation in economics has become famous. He stated that as income rises, the proportion of income spent on food falls, even though absolute expenditure on food rises. In other words, the percentage of income allocated for food purchases decreases as income rises. As a household income increases, the percentage of income spent on food decreases while the proportion spent on other goods such as luxury goods, entertainment, white goods, social status etc. One of the relevance of this statistic is reflection of the living standard of a country. The poorer is a family, the greater is the proportion of the total outgo used for food. The law also implies that the income elasticity of food demand lies between zero and one. It means that increase in expenditures on food item by the consumers is less than the increase in income of the consumers (Timmer et al., 1983).
Income elasticity of demand refers to the sensitivity of the quantity demanded for a certain good to a change in real income of consumers who buy this good, keeping all other things constant. The formula for calculating income elasticity of demand is the percent change in quantity demanded divided by the percent change in income. With income elasticity of demand, you can tell if a particular good represents a necessity or a luxury.
In microeconomics, an Engel curve describes how household expenditure on a particular good or service varies with household income, which describes relationship between goods expenditure and income systematically.
Engel’s law suggests that consumers increase their expenditures for food products in percentage terms less than their increases in income. This happens because when people become richer, they get engaged in more significant activities such as achieving bigger ambitions in life, prioritizing long-term goals, concentrating on better health, catching up on hobbies, going for higher education etc. High-income individuals eat better food – they give importance to quality than quantity; often they swap fruit juice for beverages such as tea/coffee, they replace refined grains with whole grains, eating in proper intervals rather than eating at once.
Engel’s Law states that lower income households spend a greater proportion of their available income on food than middle or higher-income households. As food costs increase, both for food at home such as groceries and food away from home for example, at a restaurant, the percentage spent by lower income households is on the higher side.
Wealth guru Tom Corley has put on his blog an individual research conducted by him on difference between rich and poor’s habits: according to his findings eighty per cent of wealthy people are focused on accomplishing some single goal and working on strategies to accomplish their goals.
Wealthy people are more concerned to keep fit. They believe in healthy body, healthy mind. They exercise regularly. Wealthy people are more organized. They keep a to-do list. Moneyed people never stop educating themselves, they keep learning new things. Whereas the poor are engaged in working hard to meet their basic physiological needs of food, thirst and sleep.
One of the most popular needs theories by Abraham Maslow’s hierarchy of needs states that motivation is the result of a person’s attempt at fulfilling five basic needs: physiological, safety, social, esteem and self-actualization. When a person earns sufficient money, his priorities from fulfilling basic needs rise to social status and esteem needs. This is the reality of Engel’s Law.