Revealed Preference Theory of Demand
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Revealed Preference Theory of Demand

Revealed Preference theory of Demand This theory is associated with the name of Prof. Samuelson. It is also called the behaviorist ordinal-utility theory. Instead of the unrealistic assumption that the consumers operate with a complete and consistent scale of preferences set out in the form of indifference curves most economists now prefer to analyze situations in which their hypothesis can be tested.

Revealed Preference theory of Demand

This theory is associated with the name of Prof. Samuelson. It is also called the behaviorist ordinal-utility theory. Instead of the unrealistic assumption that the consumers operate with a complete and consistent scale of preferences set out in the form of indifference curves most economists now prefer to analyze situations in which their hypothesis can be tested. Both Marshallian utility analysis and Allen-Hicksian indifference curve technique apply the introspec­tive method or the subjective method. But Samuelson’s revealed preference theory makes use of hypotheses which are observable and testable. There is thus a shift from the psychological to behavioristic explanation of consumer behavior.

 

According to the revealed preference theory, the consumer is supposed to reveal the nature of his preferences. He shows the goods he would prefer to purchase in a given situation even though he may not be able to show his, scale of preferences on indifference map. Thus, in the theory of revealed preference, it is unnecessary to assume that the consumers can describe their revealed preference theory. Also, as Sir John Hicks' observes, revealed preference theory lends itself to use by econometricians.

Assumptions of the Revealed Preference theory of Demand

(1) Rational Consumer. When we use the revealed preference theory in order to find out the effects of a change in price of a commodity on the demand for it, we make certain assumptions. We assume that we are considering an ideal consumer or a rational consumer. That is, we assume that the consumer seeks to maximize his satisfaction from the resources he has. As such he will choose a combination of goods which he deems most satisfying. i.e.. Which he prefers the most. It. therefore, follows that in one set of market conditions, he selects one combination and his choices will be different under different market situations.

 

(2) Consistency. We also assume that the consumer's choices are consistent. The choices of actual consumers may not be consistent but those of the ideal or national consumer may be supposed to be consistent. This consistency implies

(a).two-term consistency, and (b) transitivity.

The two-term consistency means, for instance, that if a particular combination of goods P is better than Q combination and Q is better than R, then P must also be assumed to be better than R. and R cannot be better than P Transitivity ensures that there should be no such circular relationship.

 

(3) Positive Income-Elasticity of Demand. Another very important assumption underlying revealed preference theory is that the income-elasticity of demand of the consumer must always be positive. Thai is, if his income increases, his demand for the commodity must also increase: it should not remain the same (i.e. zero elasticity) and it should not also decrease (i.e. negative elasticity) as it happens in the case of inferior goods.

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