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Superiority Of Revealed Preference Theory

Superiority of Revealed Preference Theory

            There is superiority in this approach to Hicks’ Ordinal Utility approach to customer mannerism in the market. It does not include any psychological contemplative facts about the performance of the customer in the market. The economist Samuelson believes in discontinuity in combinations of goods since he has got only one combination while in the utility and indifference curves are continuous curves which the customer has more than one combination.

            This theorem completely diminishes the concept that the customer will always have complete satisfaction. The over compensation effect is more realistic in this concept where the customers are allowed to shift to a higher price-income situation in case of rise in the price of an article and vice versa.

            The next phase of this theorem explains the income effect of Hicks in a much simpler way that shows the superiority of this theorem. This notion gives the foundation for the welfare economics in stipulations of observable performance based on reliable choice.

Defects Of the Revealed Preference Theory

            Though there is superiority of this theorem against other concepts there are so many limits which overrule this concept. Let us see what they pertain to.

  1. Ignores Indifference – The concept of indifference is ignored in this concept which the prime drawback. The customer does not divulge his indifference in a lone amount of demand function in or on the budget line when he chooses a specific set of goods at a point on the budget line.

  2. Not possible to separate substitution effect – This concept conditional rather than universal. Due to the price effects consists of the income and substitution effects, it is not feasible to separate the substitution effect on the level of observation.

  3. It excludes the Giffen paradox as discussed in the earlier chapters.

  4. The customer always does not choose only one combinations hence the theorem itself is incorrect.

  5. The concept of ‘Revealed Preference’ has been opposed by economists since the choices do not do so and the customer is always not rational.

  6. Though there are techniques to construct demand curves, it cannot be done with the set assumptions for multiple customers. It is applicable to only one customer which in practical is vague.

  7. This theorem is not valid for a game theory and it is unsuccessful during jeopardy or indecisive conditions.

            To conclude, this theorem cannot prove to be better than the indifference curve concept since the later gives overall performance of many customers and this theorem fails in this aspect. The Revealed Preference theorem lacks in the vital concepts which forms the basis of this theorem. Hence this theorem is no way superior to the other concepts of demand analysis.

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