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Economies of Scale in Decision-making Process of Household Consumption

  • Bijaya Kumar Panda
  • Siba Prasad Pothal
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    In this study, Engel elasticities are estimated from three different formulations of Engel function, i.e., in terms of per capita (Model-1); per unit (Model-2); and per unit with economies of scale (Model-3), using the unit record NSS consumption expenditure data of 55th round to confirm the reliability of elasticities when household consumption and economies of scale are taken into account. The elasticities estimated from Model-1 are higher than that of Model-3 for items having economies of scale, and lower for items having diseconomies of scale. But the elasticities estimated from Model-2 are lower for the necessary items and higher for the luxury items than that of Model-3. This indicates that the Engel elasticities would be of highly dubious value if the Engel functions do not take into account, both household composition and economies of scale effect, while estimating these elasticities.

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    Article provided by IUP Publications in its journal The IUP Journal of Managerial Economics.

    Volume (Year): V (2007)
    Issue (Month): 3 (August)
    Pages: 7-18

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    Handle: RePEc:icf:icfjme:v:05:y:2007:i:3:p:7-18
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