The document explores revealed preference theory in the context of economics, detailing concepts like utility, cardinal and ordinal utility, and the law of diminishing marginal utility. It discusses the significance of indifference curves, budget lines, and scenarios in consumer choice, particularly under the conditions of revealed preferences. Key theories and concepts, including the weak axiom of revealed preference and their practical applications, are presented to illustrate consumer behavior and decision-making.

1. SIIB-IB Batch 2015-17
Semester-I
Subject: Economics for Manager
DIV B
Submitted By:
Nikhil Chowdhary (15020241079)
Nikin Shajahan (15020241080)
Somanjali
Suraj Raje (15020241117)
Yash Lakra
Dhaval Oza (15020241146)
Topic: REVEALED
PREFERANCE THEORY
Date: September 12,2015

2. Utility
• An economic term referring to the total
satisfaction received from consuming a
good or service
• is a measure of preferences over a set of
goods and services
• it represents satisfaction

3. Utility (contd…)
• Example
• Car A and Car B
• A – lane detection and anti theft alarm
• A costs Rs 10,000 more
• Total and Marginal Utility

4. Cardinal Utility Concept
• Cardinal = Measurable
• Units – utils
• Assumptions
1. The Cardinal Measurability of Utility
2. The Hypothesis of Independent
Utilities
3. Constancy of the Marginal Utility of
Money
4. Introspective Method

5. Law of Diminishing Marginal
Utility
• “The additional benefit which a
person derives from a given increase
of his stock of a thing diminishes with
every increase in stock that he
already has”
• Significance
• the quantity demanded of a good
increase as it
• the demand curve slopes downward

6. Law of Equi-Marginal Utility
• “the consumer will distribute his money
income between the goods in such a way
that the utility derived from the last rupee
spent on each good is equal”

7. ORDINAL APPROACH
• Consumer keeps number of pair of commodity in his
mind which gives him equal satisfaction.
• Measured: qualitatively – rank wise
INDIFFERENCE CURVE
• All possible combination of two goods, which give
same level of satisfaction
ASSUMPTION
• Scale of preference
• Consumer’s preference-transitivity
• Rationality
• Diminishing marginal rate of substitution
• Concept of ordinal utility

8. INDIFFERENCE CURVE
Indifference map

9. BUDGET LINE
• Represent the various combination of two goods, which
can be purchased with a given amount of money and
given price unit.
Change in budget line
• Change in income
Increase in Income :BL shift to right
Decrease in income: BL shift to left
• Change in price of goods

10. EFFECT
• Income effect
• Price effect
• Substitution effects

11. WARP: Weak Axiom Revealed Preference
Assumptions for WARP:
• People always opt for what they prefer.
• At any circumstances, preferences of consumer are consistent
• A single observed choice reveals a stable preference.
• Single value demand function is taken into consideration

12. Background
Scenario 1 Scenario 2
Consumer consumes (X1, Y1) when (X2, Y2) was
affordable and (X2, Y2) when (X1, Y1) was not affordable.

13. WARP Theorem
Scenario 1
WARP Theorem:
If (X1, Y1) is directly preferred to (X2, Y2) then it has to be an
unlike scenario that (X2, Y2) is directly preferred to (X1, Y1)
This scenario creates ambiguity
because consumer does not act as a
maximum utilizing consumer as he
chooses (X1, Y1) in some cases and
(X2, Y2) in some scenario.

14. Other Concepts
• Sen’s α (Independence of Irrelevant alternatives)
• Sen’s β (Expansion Consistency)
• For any nonempty set, following statements are equivalent:
 Set satisfies Sen’s α and Sen’s β
 Set satisfies WARP
 Set considered is rational
• The entire idea of revealed preference is simply by using the weak
notion of “choosing what you prefer,” you get strong rationality
properties, including:
 Weakly downward sloping demand curves.
 Only relative prices matter

15. Examples & Application of the Theories
• Why this theories comes to the existence?
• Example & Application of Cardinal Utility
• Need of the Oridinal Utility.
• Example & Application of the Ordinal Utility.
• Application Reveled Preference Theory