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
.
