Engel curve

They are named after the German statistician Ernst Engel (1821–1896), who was the first to investigate this relationship between goods expenditure and income systematically in 1857.

Although the Engel curve remains upward sloping in both cases, it bends toward the X-axis for necessities and towards the Y-axis for luxury goods.

[5] When considering a system of Engel curves, the adding-up theorem dictates that the sum of all total expenditure elasticities, when weighted by the corresponding budget share, must add up to unity.

[6] Other scholars argue that an upper saturation level exists for all types of goods and services.

[5][7] In microeconomics Engel curves are used for equivalence scale calculations and related welfare comparisons, and determine properties of demand systems such as aggregability and rank.

[12] The Engel curve method is used to study the improvement of farmers' welfare by comparing food consumption and income growth.

It is not appropriate to use only the Engel method in some regions, the changes in poverty and inequality, the estimated locations and levels will be greatly distorted, which will result in wrong conclusions.

[18] Engel curves have found a wide range of applications, including assessing policies related to agriculture, taxation, trade, industrial organization, housing, and the measurement of poverty and inequality.

Engel curve and other demand function models still fail to explain most of the observed variation in individual consumption behavior.

[6] For example, some success has been achieved in understanding how social status concerns have influenced household expenditure on highly visible goods.

[21] Engel's argument is formalized in neoclassical consumer theory, which conceives of the relationship between income and consumption patterns in terms of utility optimization.

In such models, consumers allocate their expenditures to goods and services with the highest marginal utility.

There is no apparent reason why these sources of heterogeneity are statistically ignorable when estimating household Engel curves.

Latent heterogeneity in demand behavior may well be correlated with household total spending or income.