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Consumer's Equilibrium with Revealed Preference Theory

Consumer's Equilibrium with Revealed Preference Theory Critical Evaluation Merits In the previous article we have already pointed out some merits of the revealed preference (RP) theory. It is an improvement on the Marshallian utility analysis and Hicks-Allen indifference curve technique in the following ways:— (1) Behavioristic. In the first place, it is behaviouristic and draws the demand theorem from the actually observed behavior of a consumer. On the other hand, both Marshallian utility analysis and the Hicks-Allen indifference curve techniques are introspective and give psychological explanation of consumer demand. The Revealed Preference theory studies the actual behavior of a consumer and not an ideal or imaginary consumer. It is, therefore, more realistic and more scientific.

Consumer's Equilibrium with Revealed Preference Theory

Critical Evaluation

Merits

 

In the previous article we have already pointed out some merits of the revealed preference (RP) theory. It is an improvement on the Marshallian utility analysis and Hicks-Allen indifference curve technique in the following ways:—

(1)  Behavioristic. In the first place, it is behaviouristic and draws the demand theorem from the actually observed behavior of a consumer. On the other hand, both Marshallian utility analysis and the Hicks-Allen indifference curve techniques are introspective and give psychological explanation of consumer demand. The Revealed Preference theory studies the actual behavior of a consumer and not an ideal or imaginary consumer. It is, therefore, more realistic and more scientific. As Prof. Tapas Majumdar says. "Behaviorism has certainly great advantages of treading only on observed ground; it cannot go wrong."

 

(2)  No Dubious Assumptions-Samuelson's R.P. theory has another advan­tage. It steers clear of the dubious assumptions upon which the earlier theories were based. The Marshallian and the Hicksian theories were based on the utility maximization principle. This principle is more restrictive and difficult of realization in actual practice. On the other hand, Revealed preference Theory steers clear of the utility maximization principle and uses instead the consistency principle to derive the demand theorem which is much less restrictive but more realistic.

(3)   Does not Assume Continuity-The indifference curve is based on the assumption of continuity, whereas R.P. theory does not assume continuity. Indifference curve is continuous in the sense that it depicts all conceivable combinations some of which may be so unrealistic as to be ridiculous. That is why Samuelson has given up the assumption of continuity in his R.P. theory. Although, price line is drawn continuous, yet no continuity is actually involved, because the theory is based on the actually observed choice of the consumer from among such combinations as are actually available in the given price-income-situation.

Thus we have indicated above how a consumer reaches equilibrium with revealed preference hypothesis and the income effect, the substitution effect and price effect of which the former two are components.

Related keywords: iso-product curve
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