On the Determination of Economies of Scale in Household Consumption

CROSS-SECTION STUDIES on consumer behavior tacitly assume that any two households with equal per capita/per unit2 income within a homogeneous group would display similar consumption pattern. One may, however, see in practice that large households are, generally, able to enjoy higher standard of living as compared to small ones, even though both may have identical per capita/per unit incomes. Therefore, a simple and straightforward Engel curve analysis relating per capita/per unit expenditure on any specific item of consumption with per capita/per unit income may not always yield satisfactory results. This clearly necessitates a modification in the formulation of the Engel function so that it becomes possible to account for this kind of a priori information in the Engel curve analysis. Consumer behavior of large households may be more economical in respect to specific items as well as all items of consumption taken together. Therefore, attempting to incorporate such possibilities in the Engel curve analysis, Prais and Houthakker 4 introduced the concepts of 'specific' and 'income' economies of scale in household consumption. According to 'specific' economies/diseconomnies of scale, equiproportionate change in income and household size (leaving per capita/per unit income unaltered) results in less/more than proportionate change in per capita/per unit expenditure on any specific item. It is common knowledge that not all items of the household budget will reveal economies of scale in their consumption. There may as well be diseconomies of scale in the consumption of some items of the budget, which may offset, at least partly, the effects of economies of scale in the consumption of other items. In consequence, there would'be an 'overall effect' of such economies and diseconomies of scale on household consumption. This may be termed as 'income' economies/diseconomies of scale according as the degree of specific economies is greater/smaller than specific diseconomies of scale. Accordingly, a household is said to be enjoying income economies/diseconomies of scale, if it is able to enjoy higher/lower standard of living than a relatively smaller household, with the same level of per capita/per unit income. The basic problem involved in this analysis is the determination of 'specific'