Engel's law

Topic: Consumer Behaviour, Demand and Elasticity · NCERT: Beyond NCERT

Meaning

Engel's law says that as a household's income rises, the share (percentage) of income it spends on food falls, even though the amount it spends on food in rupees still rises.

• Food share = (spending on food ÷ total income or spending) × 100
• It follows from income elasticity: food as a whole is a necessity, so its income elasticity is between 0 and 1.

It matters because the food share is a simple sign of how well-off a household or a country is. It also decides how much weight food gets in the Consumer Price Index (CPI), and so how much food prices affect measured inflation.

Explanation

How it works

• Ernst Engel stated this law in 1857 after studying family budgets.
• Income elasticity of demand (eY) measures how much demand changes when income changes.

• eY = % change in quantity demanded ÷ % change in income

• For food as a whole, eY is between 0 and 1. This makes food a necessity.

• When income rises, food spending rises, but more slowly than income.

• So food takes up a smaller part of the budget.

• Why this happens:

• A person can eat only so much, so once basic hunger is met, extra income goes elsewhere.
• That extra income goes to housing, education, health, travel, consumer durables and other non-food items.

Worked example

	Income	Food spending	Food share
Before	₹10,000	₹5,000	50%
After	₹20,000	₹7,000	35%

• Income rose by 100%. Food spending rose by 40%.
• eY for food = 40 ÷ 100 = 0.4, which is less than 1, so food is a necessity.
• The family spends more rupees on food, but food is a smaller part of its budget. That is Engel's law.

The Engel curve

• An Engel curve is a graph of spending on a good (vertical axis) against income (horizontal axis).
• Necessity (such as food): the curve rises but flattens as income grows.
• Luxury (eY > 1): the curve rises more and more steeply.
• Inferior good (eY < 0): the curve slopes downward once income passes a certain level.

Engel's law inside the food basket

• The same logic applies within food itself.
• As incomes rise, spending moves away from basic calories (cereals) and towards:
• protein (milk, eggs, fish, meat)

• processed and convenience foods, and more variety

• Where the law shows up:

• Across groups: at the same time, richer groups have a lower food share than poorer groups.

• Over time: as a country grows richer, its food share falls.

• One odd year does not disprove the law, because it describes long-run trends and gaps between income groups.

In India

• Who measures it: MoSPI (Ministry of Statistics and Programme Implementation) runs the Household Consumption Expenditure Survey (HCES).

• HCES measures MPCE (monthly per capita consumption expenditure), which is the average amount a household spends per person in a month.

• Survey size (2023-24): 2,61,953 households, of which 1,54,357 were rural and 1,07,596 urban, across all states and UTs [1][2].

• Share of food in MPCE:

Year	Rural	Urban
2011-12	~52.9%	~42.6%
2022-23	~46.4%	~39.2%
2023-24	47.04% [1][2]	39.68% [1][2]

• Non-food share (2023-24): rural 52.96%, urban 60.32% [1].
• Average MPCE:
• Rural: ₹1,430 (2011-12), ₹3,773 (2022-23) and ₹4,122 (2023-24) [1][7].

• Urban: ₹6,996 (2023-24) [1].

• Reading the data:

• Urban households spend more per person and have a lower food share. This is Engel's law across groups.
• Food shares fell from 2011-12 to 2023-24. This is Engel's law over time.

• The rural share rose slightly from 2022-23 to 2023-24. A one-year rise does not break the long-run pattern.

• Inside food (2023-24): beverages, refreshments and processed food had the largest share of food spending in both rural and urban areas [1].

• Effect on the CPI:
• In the CPI, each item's weight is its share in household spending.
• The base year is the reference year whose index value is set to 100. The weights are revised with each new base year.
• 2012-base CPI (combined): food and beverages weighed 45.86%.
• New CPI (base 2024 = 100): food and beverages weigh 36.75%. These weights come from HCES 2023-24 [3][4].
• The new series uses COICOP 2018, the UN's latest system for grouping consumer spending [3][4].
• Under the old 2012 classification, the food and beverages weight would have been 40.10% [4].
  • So part of the drop from 45.86% is real (Engel's law), and part comes from the new classification.
• Food and beverages are still the largest component of the CPI [4].
• The first release under the new series was for January 2026, published in February 2026 [5].

Don't confuse with

• Food becoming an inferior good: under Engel's law, food stays a normal good (eY > 0) and absolute food spending still rises. Only its share falls. For an inferior good, the quantity bought actually falls when income rises (eY < 0).
• Engel curve: this is the graph of spending on any good against income. Engel's law is the specific finding about food's share.
• Gregory King's law: this is about price elasticity and farm supply. Because demand is price inelastic, a bumper harvest lowers farmers' total revenue. Engel's law is about income and budget shares.
• Cross elasticity of demand: this measures the response to a change in the price of another good, for example substitutes and complements. Engel's law is about the response to a change in income.

Prelims Hooks

• Engel's law (Ernst Engel, 1857): as income rises, the share of food spending falls, but absolute food spending rises. A common trap is an option saying food spending itself falls.
• For food, income elasticity is between 0 and 1, which makes it a necessity. A necessity is still a normal good.
• HCES 2023-24 (MoSPI) food share: rural 47.04%, urban 39.68%. Average MPCE: rural ₹4,122, urban ₹6,996 [1].
• The largest item within food spending in 2023-24 was beverages, refreshments and processed food, in both rural and urban areas. It was not cereals [1].
• CPI food and beverages weight: 45.86% (base 2012) → 36.75% (base 2024 = 100, weights from HCES 2023-24, COICOP 2018) [3][4].
• Food and beverages are still the largest CPI component, even after the cut in weight [4].

Mains Points

• Engel's law and inflation targeting:
• Food's falling share (HCES 2023-24: rural 47.04%, urban 39.68%) [1] led to the CPI food weight being cut from 45.86% to 36.75% [3][4].
• With a lower food weight, vegetable-price shocks move headline inflation less than before.

• This matters for the RBI's inflation targeting and for the debate on whether to target headline or core inflation.

• Farm incomes and diversification:

• Demand for cereals grows slowly as incomes rise (low eY).

• Rising farm incomes therefore need a shift towards high-eY products such as dairy, fruit and protein, plus food processing under PM Kisan SAMPADA [6].

• Nutrition concern:

• Engel's law is also working inside the food basket. Spending is moving from cereals to processed food and beverages [1].
• This shows rising prosperity, but it also brings a risk of diets high in fat, sugar and salt.
• The policy answer is food labelling and nudge-based public-health measures.

Related concepts

• Income elasticity of demand
• Cross elasticity of demand
• Necessity good
• Luxury good

Read more

• Income and cross elasticity, Engel's law and the policy uses of elasticity