Management Notes

# Management Notes

Reference Notes for Management

# Engel Curve – Cardinal Utility Approach | Microeconomics

## Engel Curve

An Engel curve is a curve that shows the optimum quantity of a commodity purchased at different levels of income. In other words, Engel’s curve indicates how much quantity of a commodity a consumer will consume at different levels of his income in order to be in equilibrium. When prices and preferences are constant, the Engel Curve is the locus of all quantity demand points for the goods at various income levels. The Engel curve was named for German statistician Ernst Engel (1821-96) and represents a relationship between the demand for a good and the income of its buyers, the former depending on the latter. An individual’s Engel curve, however, can be obtained from his ICC.

### Derivation of Engel Curve

An Engel curve is a curve that shows the optimum quantity of a commodity purchased at a different level of income. In other words, Engel’s curve indicates how mud), the quantity of a commodity a consumer with consume at different levels of his income in order to be in equilibrium. Engel’s curve can be drawn with the help of the income cons curve.

In the given figure A, apples are shown on X-axis and oranges on Y-axis, whereas in figure  B, apples are shown on X-axis and income on Y-axis. The initial budget line of the consumer is MN where E is the equilibrium position of the consumer. When income increases, the budget line shifts from MN to M1N1′ where the equilibrium position of the consumer is point increase in income of the consumer shifts the budget line from 2N2, and the equilibrium point is E2. Joining these points E, El we get income Consumption Curve (ICC). Corresponding to these of income, three perpendiculars have been drawn on the X-axis of panel B in e.

Point A shows that an income level of the consumer purchases °Xi units of apples. At an income level of 12, OX2 apples are purchased as shown by point B. Similarly, C with an income level of 13, OX3 apples is purchased. By joining points A, B, C, we get a curve E’E’ known as Engel’s Curve, which shows equilibrium quantities of apples purchased at different levels of income

### Slope of Engel Curve

• Engel curves tell us how much good is consumed based on income.
• The Engel curve is upward sloping if the good is a normal good.
• Engel curves are downward-sloping if the good is an inferior good.

### Applications of Engel Curve

• Engle curves are used in microeconomics to calculate equivalence scales, compare welfare, and determine the properties of demand systems such as aggregability and rank.
• The Engel curves have also been used to study the relationship between the composition of household demand and the composition of the industrial composition of growing economies.
• According to trade theory, countries with similar income levels possess similar preferences for goods and services (the Lindner hypothesis), and understanding how this composition changes with income may play an important role in determining global trade patterns.
• The Engel curve is also very useful in measuring inflation and tax policy.
• Engel curves are used to estimate the deviation of the consumer price index for old age.
• A comparison of food consumption and income growth is used to determine whether farmers’ welfare has improved. It also indicates the cost of living for households. It also examines the impact of household consumption diversity on welfare.
• A collective household model is estimated by the Engel curve.
• Using Engel curves, you can determine whether outdoor leisure is a luxury or a necessity.
• A deflator derived from the Engel curve is not representative of a deflator derived from the multilateral price index. In some regions, it is inappropriate to use only the Engel method. This will lead to erroneous conclusions about poverty and inequality, estimated locations and levels, etc.
• The Engel curve has a wide variety of uses, including assessing policies related to agriculture, taxes, trade, industrial organization, housing, and measuring poverty and inequality.

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### 3 thoughts on “Engel Curve – Cardinal Utility Approach | Microeconomics”

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