revealed prefernce theory of prof. samuelson is explained with diagram

1. NASIYA V K

2. INTRODUCTION

3.  The theory entails that if a consumer purchases a
specific bundle of goods, then that bundle is “revealed
preferred,” given constant income and prices, to any
other bundle that the consumer could afford..

4. ASSUMPTIONS
Rationality consistency Transitivity
Revealed
preference
axiom
Anti-
symmetric
Taste
remain
same

5. Three Axioms of Revealed
Preference
Weak
• Points on
indifference
curve
Strong
• All letters
in alphabet
Generalized
• No unique
bundle that
maximizes
utility
exists.

6.  More generally, if a consumer buys some collection of
goods, A, rather than any of the alternative collections
B, C and D and if it turns out that none of the latter
collections is more expensive than A, then we say that
A has been revealed preferred to the combinations B,
C and D or that B, C and D have been revealed inferior
to A.

7. Graphical representation

8. Derivation of demand curve
 We can also derive the demand curve of an individual
from the revealed preference hypothesis. This is
explained in the following Figure. In Panel (A), money
is taken on the vertical axis and good X on the
horizontal axis. LM is the original price-income line on
which the consumer reveals his preference at point R
and buys OA of good X.
 Suppose that the price of X falls. As a result, his new
price- income line is LS. On this line, the consumer
reveals his preference at point T where he buys a larger
quantity OB of X than before.

9. Graphical representation

10.  In Panel (B) of the figure, we measure price on the
vertical axis and units of good X on the horizontal axis
and draw E and E1 price-quantity combinations. By
joining these points with a smooth line, we get the
demand curve DD1 .This curve shows that as price falls
from OP to OP1 the consumer buys more quantity AB
of X.

11. Conclusion
 The revealed preference theory is considered as a
major break through in the theory of demand because
it established the law of demand directly based on
observed consumer behavior in the market.

12. Thank you