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Samuelson developed revealed preference theory in 1948 as an alternative to existing demand theories. Revealed preference theory explains consumer demand based on their actual observed choices between commodity bundles at different price points, rather than assuming consumers have internal utility functions. It deduces utility from behavior. The theory's key assumptions are rationality, consistency, and transitivity of preferences. It holds that a consumer's choice reveals their preference - if they choose bundle A over B, A is revealed to be preferred.
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- 1. Consumers Behaviour Dadhi Adhikari KathmanduCollege of Management 11 October,2007
- 2. Revealed Preference Theory •Prof Samuelsion developed his theory of revealed preference in his article "consumption Theory in terms of Revealed Preference" in 1948. • Before this theory, there were two approaches to explain consumers demand for goods and services – (a) Marshallian demand based on cardinal utility. – (b) Hicksian demand based on ordinal utility
- 3. Revealed Preference Theory •But both of these approaches – (i) Use introspective method i.e. they give psychological explanation of consumer's behavior. – (ii) Assumes that the consumer possesses a utility function.
- 4. Revealed Preference Theory •Revealed Preference Theory (RPT) – (i) Explains consumers demand based on observed actual behavior of consumer in the market at various income- price situation. – (ii) Deduce utility function from consumer's observed choices among commodity bundles.
- 5. Revealed Preference Theory •Assumptions of RPT (i) Rationality: Prefers more over less. (ii) Consistency: If A> B, then B > A (iii) Transitivity: if A>B, B>C then A>C (iv) The Revealed Preference Axiom: Choice reveals preference.
- 6. Revealed Preference Theory •Explanation of RPT • Suppose there are two bundle of commodity Q0 and Q1 . If consumer purchase Q0 then we can say – Either Q0 is cheaper than Q1 – or consumer prefers Q0 over Q1 • In first case we can not say that consumer has revealed his preference for. But in second case we can say that consumer has revealed his preference to Q0 .
- 7. Revealed Preference Theory . Y1 X1 Y X H G F E C B A LetP0 is the price of both bundle then we can say consumer has revealed his preference for Q0 if P0 Q1 < P0 Q0 .