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Unit-5: The Revealed Preference Theory of Demand

1. This does not study any psychological internal information of consumer behaviour. But it gives the Notes
analysation by analyzing the consumer behavior in market. According to Samuelson, this theory
has removed the demand theory from the last leftovers of psychological analysis. So the revealed
preference theory is more scientific and real than earlier demand theorems.
2. This theory is left to get in touch from the continuity of both used and indifference curve. An
indifference curve is a curve, on which consumer can select any combinations of the products. But
Samuelson believes that this is a discontinuity because consumer can only get single combination.
By applying Samuelson’s theory, Hicks has applied strong and weak ordering in spite of continuity
and assumption in his Revision of Demand Theory.
3. The Revision of Demand Theory of Hicks is based on this theory that the consumer is prudent to
fulfill his satisfaction by his given income. The Demand Theorem of Samuelson is good because it
does not assume that the consumer always wants to get maximum satisfaction and does not apply
the bogus theory like decreased marginal theory of Marshall and decreased marginal relocation
theory of Hicks.
4. In the first stage of Samuelson’s Demand Theorem, as the subbing effect of Slutsky and the over
compensation effects of Hicks, it gives more real analysis and data. When the price of product X
decreases this theorem relocates the consumer to his up price income status and vice versa. This is
revolution of Hicks income compensation change. Then, Hicks has left the income compensation theory
and took Samuelson’s thought as over compensation effect as ‘Cost Difference’ in his book Revision of
Demand Theory. Thus, in the second stage Samuelson’s theorem describes the income effect of Hicks
in very simple manner. Hicks agrees with this theorem by himself when he said, “To present an open
option to indifferent method, this theory is a new and very important theorem by Samuelson.”
5. This theorem gives a base to welfare economics by consistent election of analysis.

Self Assessment

Multiple choice questions:
4. The income elasticity of demand is ......................
(a) positive (b) negative (c) low (d) more
5. Reveals Preference Theory is based upon .......................
(a) order (b) power (c) more ordering (d) point
6. The ...................... of Samuelson is general and not conditional.
(a) theorem (b) part (c) theory (d) law
7. Revealed Preference Theory is only based on personal .......................
(a) consumer (b) condition (c) law (d) theory

Give your opinion about Demand Theory.

5.6 Defects of the Revealed Preference Theory

There are lots of defects in Samuelson’s revealed preference theory:
First, it clearly ignores the indifferent behaviour of consumer. It is quite correct that if a consumer
selects a combination of product on point R then he does not represent his indifferent behaviour on

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