Revealed Preference Theorem

Paul Anthony Samuelson

(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'.