The Engel expenditure curve cannot lie below this line, since normally it is not possible for a consumer to incur expenditure more than the income. As the consumer has to save a part of this income for various contingencies or speculations, thus, the actual Engel expenditure curve lies above the 45° line.
At extremely low levels of income, people spend a very large proportion of their income on necessities of life particularly food. With rise in the income of the consumer, expenditure on food increases, but the proportion of expenditure on food declines.
Since this sort of behaviour of the consumer was first observed by Ernst Engel, it has come to be known as Engel’s law. Fig. 5.41(a) illustrates the Engel curve for food. At a low level of income OY1 or BE1, consumer spends only OE, equal to F1E1 on food and there is a saving of BF1.
When the income level rises to OY2 or CE2, the expenditure of the consumer increases to OE2 equal to F2E2, the saving increases to CF2. Further, when the income goes up to OY3 or OE3, the expenditure of the consumer on food becomes OE3 equal to F3E3 and hence there is saving of DF3, which is still higher than CF2.
We observe that with increase in the income of the consumer, though the expenditure on food rises in absolute terms, it declines in percentage terms. As a result, the Engel Expenditure curve diverges more and more from the 45° line, as income increases.
If an Engel expenditure curve is drawn for luxury commodities, we observe that the expenditure rises more than proportionately to rise in income at higher income levels (Fig. 5.41(b). On the other hand, Engel expenditure curve for inferior commodities declines, as income rises (Fig. 5.41(c)).