ovjeet/ecodept-sem4/mbbc

Notes on Income Consumption Curve and Engel Curve

Income consumption curve is the locus of the equilibrium quantities consumed by an

individual at different levels of his income.
Thus, the income consumption curve (ICC) can be used to derive the relationship between
the level of consumer’s income and the quantity purchased of a commodity by him.
A nineteenth century German statistician Ernet Engel (1821-1896) made an empirical study
of family budgets to draw conclusions about the pattern of consumption expenditure, that is,
expenditure on different goods and services by the households at different levels of income.
The conclusions he arrived at are still believed to be generally valid.
According to Engel’s studies, as the income of a family increases, the proportion of its income
spent on necessities such as food falls and that spent on luxuries (consisting of industrial
goods and services) increases. In other words, the poor families spend relatively large
proportion of their income on necessities, whereas rich families spend a relatively a large
part of their income on luxuries.
This change in the pattern of consumption expenditure (that is, decline in the proportion of
income spent on food and other necessities and increase in the proportion of income spent
on luxuries) with the rise in income of the families has been called Engel’s law.
Though Engel dealt with the relationship between income and expenditure on different
goods, in order to keep our analysis simple we will describe and explain the relationship
between income and quantities purchased of goods. However, both types of relations will
convey the same information about individual’s consumption behaviour as in our analysis of
Engel’s curve the prices of goods are held constant.
The curve showing the relationship between the levels of income and quantity purchased of
particular commodities has therefore been called Engel curve. In what follows we explain
how an Engel curve is derived from income consumption curve. In our analysis of Engel
curve we relate quantity purchased of a commodity, rather than expenditure on it, to the
level of consumer’s income.
It is worth noting that like the demand curve depicting relationship between price and
quantity purchased, other factors remaining the same, Engel curve shows relationship
between income and quantity demanded, other influences on quantity purchased such as
prices of goods, consumer preferences are assumed to be held constant.
For deriving Engel curve from income consumption curve we plot level of income on the Y-
axis and quantity purchased of a commodity on the X-axis. Consider panel (a) in Fig. 8.33.
Given the indifference map representing the preferences of a consumer and the prices of two
goods X and Y, ICC is the income consumption curve showing the equilibrium quantities
purchased of commodities by the consumer as his income increases from Rs. 300 to Rs. 400
and to Rs. 500 per day.

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It will be seen from panel (a) of Fig. 8.33 that when income is Rs. 300, given prices of goods
X and Y, the consumer is buying OQ1 quantity of the commodity X. In panel (b) of Fig. 8.338.3
in which level of income is represented on the vertical axis and quantity purchased of
commodity X on the horizontal axis we directly plot quantity OQ1 against income level of Rs.
300.

As income increases to Rs. 400, prices of goods

remaining constant, the budget line in panel (a)
shifts outward to the left to the new position
B2L2 with which consumer is in equilibrium at
point S and the consumer buys OQ2 quantity of
good X. Thus, in panel (b) of Fig. 8.33 we plot
quantity purchased OQ2 of commodity X against
income level of Rs. 400. Likewise, as income
further rises to Rs. 500, budget line in panel (a)
shifts to B3L3 and the consumer buys OQ3 quantity
of X in his new equilibrium position at T.
Therefore, in panel (b) of Fig. 8.33. OQ3 we plot
OQ3 against income of Rs. 500.
Thus equilibrium points constituting the income consumption curve in consumer’s
indifference map have been transformed into Engel curve depicting quantity-income
quantity
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relationship. Each point of an Engel curve corresponds to a relevant point of income

consumption curve. Thus R’ of the Engel curve EC corresponds to point R on the ICC curve.
As seen from panel (b), Engel curve for normal goods is upward
upward-sloping
sloping which shows that as
income increases, consumer buys more of a commodity.
commo
The slope of Engel curve EC drawn in panel (b) of Figure 8.33 equals AM/AQ where AM
stands for change in income and AQ for change in quantity demanded of good X and has a
positive sign. It is important to note that the slope of the Engel curve in Fig.
Fig. 8.33 (panel (b))
increases as income increases. This indicates that with every equal increase in income,
expansion in quantity purchased of the good successively declines.
This upward-sloping
sloping Engel curve with increasing slope as income rises depicts the case of
necessities, consumption of which increases relatively less as income rises. For instance, in
Fig. 8.33 when income is initially Rs. 300 (= M1) per week, the quantity purchased of the
good X equals OQ1 and when income rises by Rs. 100 to Rs. 400 (= Mg2) per week he
increases his consumption to OQ2, that is, by quantity Q1 Q2.
Now, when his income per week further increases by Rs. 100 to Rs. 500 per week, the
quantity consumed increases to OQ3, that is, by Q2Q3 this is less than Q1Q2. Thus, in Engel
curve drawn in panel (b) of Fig. 8.33 quantity purchased of the commodity increases with the
increase in income but at a decreasing rate. This shape of the Engel curve is obtained for
necessities.
The Engel curve drawn in Fig.8.34 is upward
upward-sloping but is concave. This implies that slope
of the Engel curve (∆M/∆Q)
∆M/∆Q) is declining with the increase in income. That is, in the Engel
curve of a commodity depicted in Fig. 8.34 the equal increments in income result in
successively larger increases in the quantity pu
purchased
rchased of the commodity. Thus, in Fig. 8.34
at income of Rs. 300 the consumer purchases OQ1 quantity of a commodity.
The increase in income by Rs. 100 to Rs. 400 results in increase in quantity purchased of the
commodity equal to Q1Q2. With the further in increase
crease in income by the same amount of Rs.
100 to Rs. 500, the quantity purchased increases by Q2Q3 which is much larger than Q1Q2.
This implies that as a consumer becomes richer he purchases relatively more of the
commodity. Such commodities are called luxuries.. Examples of luxuries are air travel, luxury
cars, costly woollen suits, air conditioners, costly fruits, etc.
In case of inferior goods,, consumption of the commodity declines as income increases. Engel
curve of an inferior good is drawn in Figure 88.35
.35 which is backward bending indicating a fall
in the quantity purchased of the good as income increases.
An extreme case of Engel curve is a vertical
straight line as drawn in Fig. 8.36. This
represents the case of a neutral
eutral commodity
which is quite unresponsive to the increase in
income. The Engel curve of the shape of a
vertical straight line shows that a person goes
on consuming the same amount of a
commodity whatever the level of his income.
For example, the quantity y of common salt
purchased by a family remains the same,
determined as it is by food habits, with the
increase in their income.
Ref:
http://www.economicsdiscussion.net/cardinal-
http://www.economicsdiscussion.net/cardinal
utility-analysis/notes-on-income
income-consumption-
curve-and-engel-curve-with-curve
curve-diagram/1040
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