(1) Revealed preference theory, pioneered by Paul Samuelson, analyzes consumer choice and behavior based on actual choices made between bundles rather than assumed utility functions. (2) It establishes that a consumer's preferences are rational if they satisfy the weak axiom of revealed preference (WARP) and its strengthened version, the strong axiom of revealed preference (SARP). (3) Consumer surplus measures the difference between the maximum price consumers would be willing to pay for a good or service and the actual market price, representing the extra satisfaction consumers receive from purchasing the good.

1. SEMINAR TOPIC:-
REVEALED PREFERENCE THEORY
&
CONSUMER SURPLUS
Submitted to:-
Dr. Anandamoy Mondal
Miss A. Sanyal
Submitted by:-
Satyanarayana Boda
1st year MFSc
F.E.C – 501
Dept.of fisheries economics and
statistics
9/15/2015Dept.ofF.E.S,F.F.SC,W.B.U.A.F.S

2. REVEALED PREFERENCE
 Pioneered by American economist Paul Samuelson.
 Used analyze choice made by consumer.
 Policies on consumer behavior.
 Preference depend on habits.
ORIGIN OF THE THEORY.
 Older theories depends on diminishing marginal rate of substitution
(MRS).
 Means to reconcile demand theory by defining utility functions by
observing behaviour.9/15/2015 Dept. of F.E.S, F.F.SC, W.B.U.A.F.S

3.  (x1, x2) is chosen when (y1,
y2) could have been
chosen:
p1x1+p2x2≥p1y1+p2y2
 (x1, x2) is directly
revealed preferred to (y1,
y2).9/15/2015 Dept. of F.E.S, F.F.SC, W.B.U.A.F.S

4.  Suppose there is a unique optimal bundle for each budget set;
 Suppose the consumer always chooses the most preferred bundle
he/she can afford;
 Suppose the consumer has chosen (x1, x2) when faced by (p1, p2);
 Suppose p1x1+p2x2≥p1y1+p2y2;
 we must have 1 2 1 2( , ) ( , )x x y y
9/15/2015 Dept. of F.E.S, F.F.SC, W.B.U.A.F.S

5. Contd….
 Suppose the consumer has chosen (y1, y2) when faced
by (q1, q2);
 Suppose q1y1+q2y2≥q1z1+q2z2;
 Then we know that
1 2 1 2 1 2 1 2( , ) ( , ) and ( , ) ( , )x x y y y y z z
 From transitivity we can conclude that:
1 2 1 2( , ) ( , )x x z z
 (x1, x2) is indirectly revealed preferred to (z1, z2).
1 2 1 2 1 2 1 2( , ) ( , ) and ( , ) ( , )x x y y y y z z
9/15/2015 Dept. of F.E.S, F.F.SC, W.B.U.A.F.S

6.  (x1, x2) is indirectly revealed preferred to (z1, z2).
9/15/2015 Dept. of F.E.S, F.F.SC, W.B.U.A.F.S

7.  WARP: If
 (x1, x2) is directly revealed
preferred to (y1, y2);
 and (x1, x2)≠(y1, y2);
 Then (y1, y2) cannot be
directly revealed preferred
to (x1, x2).
9/15/2015 Dept. of F.E.S, F.F.SC, W.B.U.A.F.S

8. SATISFACTION OF WARP
 Example of coke and Pepsi.
conclusion
Consumer should have
consistent preferences.
(Y1, Y2 ) & (Z1, Z2 ) non profit
maximizing consumers.
If (Y1, Y2 ) RP to (Z1, Z2 ) &
(Y1, Y2 ) (Z1, Z2 ) then it
can’t happen that
(Z1, Z2 ) RP to (Y1, Y2 ).
9/15/2015 Dept. of F.E.S, F.F.SC, W.B.U.A.F.S

9. MATHEMATICAL EXPRESSION OF WARP
 At price p1 & p2
( P1 Y1 + P2 Y2 ) > or = (P1 Z1 + P2 Z2 )
At price Q1 &Q2 if (Z1, Z2 ) bundle is chosen then it cant be
the case that
(Q1 Z1 + Q2 Z2 ) > or = (Q1 Y1 + Q2 Y2 )
9/15/2015 Dept. of F.E.S, F.F.SC, W.B.U.A.F.S

10. Checking on WARP
 Assume that
Bundles Price
X={2,2,2} P={2,2,2}
X’={3,1,2} P’={1,3,2}
X”={4,1,1.5} P”={2,1.5,5}
B/W X &X’
PX=12 P’X=12
PX’=12 P’X’=10
So P’X’<P’X WARP is satisfied
 X is p X’
B/W X’ &X”
P’X’=10 P”X’=17.5
P’X”=10 P”X”=17
So P”X”<P”X’ WARP is satisfied
 X’ IS P X”
9/15/2015 Dept. of F.E.S, F.F.SC, W.B.U.A.F.S

11.  B/W X &X”
P”X”=17 PX”=13
P”X=17 PX=12
SO PX<PX” WARP is satisfied
X” Is P X
Finally XPX’PX”PX it is violating WARP and
transitivity law.
XPX’ &X’PX” = XPX”
To come up this problem SARP is formulated.
CONTD…..
9/15/2015 Dept. of F.E.S, F.F.SC, W.B.U.A.F.S

12.  SARP: If
 (x1, x2) is (directly or indirectly) revealed preferred to (y1, y2);
 and (y1, y2)≠(x1, x2);
 Then (y1, y2) cannot be (directly or indirectly) revealed preferred
to (x1, x2).
 SARP is both necessary and sufficient for rational consumer
behavior.
 For any finite set of bundles x1,x2,x3........... xn-1xn if x1 RP x2
x2 RP x3 ........ xn-1 RP xn then xn is not RP x1.
9/15/2015 Dept. of F.E.S, F.F.SC, W.B.U.A.F.S

13.  Excess of the price which a consumer would be willing to pay
rather that go without a thing over that which he actually does
pay, is the economic measure of surplus satisfaction. (Marshall)
 Important to implement policies like –
1.Taxation.
2.Price policy by monopolist.
 This is the extra satisfaction for same price.
9/15/2015 Dept. of F.E.S, F.F.SC, W.B.U.A.F.S

14.  Derived from law of diminishing marginal utility.
 Consumer’s surplus = What a consumer is prepared to pay -
What he actually pays.
= Sum of marginal utility - (Price x No. of units purchased).
 Consumer’s Surplus =Total Utility – (Number of Units of a
Commodity Purchased * Price of the Commodity).
9/15/2015 Dept. of F.E.S, F.F.SC, W.B.U.A.F.S

15. PRICE
(IN RS/KG.)
NO.OF
BUYERS
QUANTITY
DEMANDED(KG)
100 1 1
80 2 2
60 3 3
40 4 4
9/15/2015 Dept. of F.E.S, F.F.SC, W.B.U.A.F.S

16. MATHEMATICAL EXPRESSION
 Calculate consumer surplus at price 40.
 C.S of 1st buyer = 100 – 40= 60.
 C.S of 2nd buyer = 80 – 40= 40.
 C.S of 3rd buyer = 60 – 40= 20.
 Total C.S = 60+40+20=120.
9/15/2015 Dept. of F.E.S, F.F.SC, W.B.U.A.F.S

17. 9/15/2015 Dept. of F.E.S, F.F.SC, W.B.U.A.F.S

18. Importance of Consumer’s
Surplus
 1) Distinction between value- in-use and value-in-exchange.
 2) Helpful to monopolist in price fixation.
 3) Helpful to policy makers.
9/15/2015 Dept. of F.E.S, F.F.SC, W.B.U.A.F.S

19. 9/15/2015 Dept. of F.E.S, F.F.SC, W.B.U.A.F.S