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Unit-5: The Revealed Preference Theory of Demand

2. The selection of a combination reveals the preference of that combination for the consumer. Notes
3. The consumer selects a combination on a given price income line means there must be change in
price whatever he buys.
4. He always gives preference for the combination of more items rather than the combination of fewer
items.
5. The selection of consumer is based on strong ordering.
6. This works on consistency behaviour of consumer. If in a situation he gives preference to A rather
than B, then he cannot give preference to A on B in another situation. According to Hicks, this is
two-term consistency for which a rule must be followed on a simple line curve– (a) If A is situated
on the left side of B then B must be on the right side of A, (b) If A is situated on the right side of B
then B must be on the left side of B.
7. This law is based on transitivity. The transitivity directs three terms consistency. If he reveals
preference for A rather than B and B over C, then consumer would must reveal preference for A rather
than C. If consumer wants to select on the given possible combinations then it must be workable for
the theory of choice of preference.
8. The demand of income elasticity is positive means if the income increases then the demand of
produce increases and vice versa.

Self Assessment
Fill in the blanks:
1. The derivation of demand curve from Prof. Samuelson is theoretical ......................... analysis.

2. The derivation of demand theory of Prof. Samuelson is based on .........................
3. The tastes of consumer ......................... change.

Fundamental Theorem or Demand Theorem

With these assumptions, Samuelson has given the Fundamental Theorem which is also called demand
theorem and as per his words, “The demand of product (general or combined) is increased when price
income increases, the demand will sure low when the price ups for this product.” It means that when
the demand of income elasticity is positive then the demand of price elasticity would be negative. This
can be shown by ups and downs in price of a product.

(a) Rise in Price

First, we would analyze the rise in price of a product X.
To prove this theorem we separate this into two stages. In the first stage, we would take a consumer
who spends his all income in two products X and Y. In Fig. 5.2, LM is his original price income line
where he selects the combination of R. Triangle OLM is the region of selection for consumer where he
gets various combinations of X and Y on price income line LM. Consumer gives preference by selecting
R on or in triangle OLM.

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