(May 15, 1915 December 13, 2009) Revealed Preference theory was developed by Paul A. Samuelson in 1938.This was developed as an alternative theory of demand based on observed market behaviour of the consumers.
According to Samuelson, a consumer with a given income will buy a mixture of products; as his income changes, the mixture of goods and services will also change. It is assumed that the consumer will never select a combination which is more expensive than that which was previously chosen.
An economic theory of consumption behavior which asserts that the best way to measure consumer preferences is to observe their purchasing behavior. Revealed preference theory works on the assumption that consumers have considered a set of alternatives before making a purchasing decision. Thus, given that a consumer chooses one option out of the set, this option must be the preferred option.
In order to find out the consumer's equilibrium position with the Revealed Preference Analysis, we make the following assumptions.
1. The consumer has a fixed amount of income. 2. There are only two commodities available in the market, namely X and Y. Assumptions: In order to explain the behaviour of the consumer with the help of Revealed preference Analysis, Mr. Samuelson made the following assumptions.
1. Utility cannot be measured.
2. The consumer always prefers more of a good to less, until his income is exhausted.
3. It is based on the Principle of Strong Ordering. This means that if the consumer is given many commodities, he can place them in order of his preference.
4. It is based on the Principle of Consistency, and the consumer acts consistently. 'Consistency in choice' means that if the consumer chooses the commodity combination A in preference to all other combinations, then he will never subsequently choose any combination from the rejected ones in a situation in which A is also available. This is the key to this approach.
5. The choice made by the consumer will reveal the preference of the consumer for the commodity. If he chooses A over B, then this choice reveals his preference for A
6. The consumer's preference pattern maintains transitivity. If the consumer prefers A over B, and B over C, Then he definitely prefers A over C.
As per the theory it is possible to discern consumer behaviour On the basis of variable prices and income. In other words, it has made possible to establish the law of demand without the use of indifference curves on the basis of revealed preference axioms. The theory is especially useful in providing a method for analyzing consumer choice empirically. Revealed preference theory deliberately ignores measures of utility and indifference. An empirical utility theory, it superseded cardinal utility in consumer theory. The revealed preference theory is 'behaviourist', while the indifference curve approach is 'introspective'.