Page 96 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Unit-5: The Revealed Preference Theory of Demand

a consumer does not need to give information regarding his tastes or lines to his preferences. But to use the Notes
consumer market behaviour and applying revealed preference, an upward indifference curve is drawn.

Its Assumptions

This analysis is based upon following assumptions:
1. The taste of consumer do not change.
2. He always gives preference to the combination of more products rather than the combinations of
fewer products.
3. The behaviour of consumer is identical means if preference is given to A than B in a condition then
in the other condition, B is not getting more preference than A.
4. There is motion in consumer’s preferences. It means if A is getting more preferences than B and B
is more than C, then consumer will prefer A rather than C.
5. X and Y are two products.
If this assumption is given consumer would give preference to the combination of two products rather
than other combinations, either the selected combination is more preferable to him or the combination
which is not selected is out of his pocket range.
Suppose that in Fig. 5.5, consumer represents his preference to combination R on original budget line LM.
On line LM and all points below point R show the inferior combinations. This is shown by shaded region
which is called inferior zone. On the other hand, above R and/or in TRS region, all points are prefered by
R, because the quantity of X and/or Y is available more on it. So the shaded region TRS above R is called
Preferred Zone. However, in the left and right side of R above the TRS region and above LM line, two
combinations are found which are not directed by the consumer. They are called TRL and SRM which are
called Ignorance Zone, because there is no idea about consumer preferences on it. This result to cross R is
must for below TRS region and above the budget line LM. The slope should must be positive in point R
and should upwards to original point, because this ignorance would locate in above and ground region.

Fig. 5.5 Fig. 5.6

G T
Ignorance Zone P
T
L L A
Preferred Goods Y H
Zone
Goods Y R S K R S

Inferior Zone Ignorance Zone B
O M O
Goods X Q M N
Goods X

Thus the new budget line for consumer is KN. In Fig. 5.6 which crosses point B on point R in original
line LM. Now consumer will choose the combination B or the other combinations of BN of line KN.

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