Demand Theorem with Revealed Preference Hypothesis
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Demand Theorem with Revealed Preference Hypothesis

Demand Theorem with Revealed Preference Hypothesis It may be noted that there is strong ordering so far as indifference curves themselves are concerned, because each indifference curve represents different level of satisfaction. As between indifference curves, one can at once say which one would prefer the most. But there is a weak ordering so far as the combinations of goods on the same indifference curve are concerned because they represent the same level of satisfaction. Since they are equally satisfactory, the consumer hesitates and cannot at once reveal his preference.

Demand Theorem with Revealed Preference Hypothesis

It may be noted that there is strong ordering so far as indifference curves themselves are concerned, because each indifference curve represents different level of satisfaction. As between indifference curves, one can at once say which one would prefer the most. But there is a weak ordering so far as the combinations of goods on the same indifference curve are concerned because they represent the same level of satisfaction. Since they are equally satisfactory, the consumer hesitates and cannot at once reveal his preference.

A weak ordering divides the items of purchase into groups: the groups may be strongly ordered showing a definite sequence of preference but there is no such preference within the group itself, i.e. there is weak ordering within the group. There may be two or more positions at the top and the choice between these cannot-be easily explained. In case the ordering is strong, the consumer chooses the most preferred position and the preference explains the choice.

The conventional indifference curve is an illustration of weak ordering because all points on the same indifference curve are equally preferred to represent a non-ordered group. Samuelson theory assumes strong ordering. He rules out die possibility of weak ordering and thinks that in the choice that a consumer makes he reveals his preference. Thus, the behavior of the individual refolds his preference. That is how the revealed preference theory derives a demand theorem from the actually observed behavior of the consumer.

Demand Theorem with Revealed Preference Hypothesis

It can be easily explained that the Marshallian law of demand can be derived with aim of revealed preference hypothesis. According to the Marshal­lian law of demand, demand extends with a fall in price and contracts with a rise in price, other things remaining the same, ie., consumer's income and other relevant prices do not change. Samuelson has tried to demonstrate this inverse relationship between price and the amount demanded by assuming income elasticity of demand to the positive.

 

Samuelson states the demand theorem under the title 'Fundamental Theorem of Consumption theory" thus: any goods (simple or composite) that are known always to increase in demand when income alone rises must definitely shrink in demand when its price alone rises." In this proposition, income elasticity of demand has been assumed to be positive.

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Comments (1)

Very insightful post!

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