The Engel curve is a graphic representation of how the demand for a certain good changes when a change is applied to the income of consumers, considering that the price of the other goods remains constant.
This concept is very useful to know the demand of a good, and thus be able to adjust to the most optimal or that best suits us as a company, as well as to know its evolution. For each income level, we will have an optimal amount of goods to which we adjust, depending on the preferences that certain consumers have.
On the other hand, the Engel curve is the point of tangency that exists between the indifference curve and the consumer's budget constraint. Remember that the budget restriction is the maximum amount that a consumer is willing to spend (of the total budget he has and does not allocate to savings). If he income level of a consumer changes, the demand for the good that is being studied will also change, producing an adjustment reflected in the Engel curve.
Examples to understand the Engel curve
It is also interesting to study the slope of the Engel curve, which will depend on the nature of the good:
- If the good is normal, the slope is positive (income increases, demand increases). To give an example: beef or meat of extreme quality, when consumers' income increases, we hope that their demand will also increase. In this case, the Engel curve will have a positive slope (or with an upward trend).
- If the good is lower, the slope is negative (income increases, demand is reduced). This happens in products such as poor quality bread, when consumers' income increases, they will tend to exchange it for another type of bread. The Engel curve will slope downward (or trend downward).