How the Engel Curve Influences Individual Demand

How the Engel Curve Influences Individual Demand
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  • 0:02 What is the Engel Curve?
  • 1:10 Mechanics of the Curve
  • 2:28 How Producers Use the Curve
  • 4:26 Lesson Summary
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Lesson Transcript
Instructor: Kevin Newton

Kevin has edited encyclopedias, taught middle and high school history, and has a master's degree in Islamic law.

Ever wonder how income affects demand? If you're an economist, you've got the Engel curve to explain that very thing. Additionally, the Engel curve helps economists identify inferior goods and helps producers make supply decisions.

What Is the Engel Curve?

Let's say you had a standard middle class existence, then one day you won the lottery! While I'm sure you could think of things that you would change immediately such as your clothes, your house, your car, and possibly your job, I can think of some other things that are sure to change as well.

For starters, the proportion of your income that you spend on various things. (Such a killjoy, aren't I?) Then you're really not going to like the next part. Instead of winning the lottery, your pay was suddenly cut in half. All the above would likely change, too, especially the percentage of income spent on various things.

Now, for an economist who likes to see how money moves through the economy, any change is worth noting. Think of all the changes that would happen if a new high-paying employer moved to an area or if everyone was laid off. Economists need a way of seeing how changes in income change the demand for certain goods. Luckily, they have a tool that does exactly that: the Engel curve.

Mechanics of the Curve

The Engel curve itself can take many different shapes. Most of the time, it looks like any other demand curve, starting low on the left and rising as it reaches to the right. After all, this is how demand works: the more money someone has to spend, the more of a good he or she will buy. Of course, this only continues up to a point. Once it reaches the point at which it no longer provides sufficient utility for a consumer, consumption will stop. After all, even a billionaire only needs so many TVs.

Normal Goods
normal good curve

However, that assumes that the good in question is a normal good. Since we are talking about lower incomes here, what about inferior goods? As you might expect, an inferior good has the exact opposite curve of a normal good on an Engel curve. Whereas the normal good's quantity rises with income, the inferior good experiences a decline and ultimately a crash, as more and more income is earned. Billionaires may only need so many TVs, but you can bet that as they begin to make more money, most of them trade in their bus pass for the keys to a new car.

Inferior Goods
inferior good curve

How Producers Use the Curve

Let's pretend that you are the purchasing manager for a retailer in a given region and have to use the Engel curve to determine what goods with which to stock your stores. You know that there is a new biotech research center that is opening across town that is sure to produce some very high-paying jobs. How do you prepare?

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