Hicks revised demand theory by assuming consumers follow a preference hypothesis where they choose the alternative they prefer most from available options based on their preferences. Hicks presented demand theory using indifference curves to represent scales of preference, abandoning indifference curve analysis. He distinguished between strong ordering, where each item has its own ranking number, and weak ordering, where items are grouped but no internal group ordering exists. Hicks also introduced the direct consistency test and derived the law of demand using the methods of compensating variation and cost difference to decompose total effects into price, income, and substitution effects.

1. HICKS
REVISION OF DEMAND
THEORY

2. Preference hypothesis and logical ordering
 Hicks assumes preference hypothesis as a principle
which governs behavior of ideal consumer.
 The behavior according to scale of preferences is
known as preference hypothesis.

3. Preference hypothesis and logical
ordering
 Ideal consumer chooses that alternative which he prefers most
out of various alternatives open to him.
 The ideal consumer is affected only by current market
condition.

4. Preference hypothesis and logical
ordering
Demand theory that
was presented by hicks
under ‘Value and
Capital’
Scales of
preference was
given in the form
of set of
indifference
curves.
Indifference curve
analysis was given
up

5. Preference Hypothesis and logic of
ordering

6. Preference Hypothesis and logic of
ordering
Difference between
Strong
Ordering
Weak
Ordering

7. Each item has a place
of its own and each
could then be given a
number
To each number
there would be 1
item & only item
would correspond
Strong
Ordering

8. If items are clustered into
groups but none of items
within group can be put
ahead of others.
Consists of division
into groups ,sequence
of groups is strongly
ordered ,but no
ordering within groups.
Weak
Ordering

9. Price income situation of
ideal consumer: aa
Available choice: any
combination on or inside aa
Actual choice : A
Preference hypothesis and logic of
ordering

10. Preference hypothesis and logic
of ordering
A is preferred to B:
it only shows that
B is not preferred to
A

11. Preference hypothesis and logical
ordering
• Revealed preference approach shows strong ordering
• Weak ordering implies that consumer choose a
combination and rejects all other alternatives open to him
• Rejected combinations need not be inferior to the
position actually chosen but may have been indifferent.

12. The Direct Consistency Test

13. Direct Consistency Test

14. Direct Consistency Test

15. Direct Consistency test

16. Derivation of Law of Demand
through the method of
Compensating Variation
A
A2
B1B2B
R
T
S
X-Commodity
Money
Y
X
R-S= Price effect
S-T= Income effect
R-T=Substitution effect

17. Derivation of Law of Demand
through the method of Cost
Difference
A
A2
B1B2B
T
S
X-Commodity
Money
R
Y
X
R-S= Price effect
S-T= Income effect
R-T=Substitution effect