revealed preference theory

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Fig. 172 Revealed preference theory.

revealed preference theory

an explanation for an individual consumer's downward-sloping DEMAND CURVE, requiring the consumer to reveal what his preferences are in given sets of circumstances. The preferences given may be between two or more goods, but where more than two goods exist, money is taken to represent all other goods for ease of graphical analysis, as in Fig. 172.

If a consumer decides that he prefers a combination of money (OM1) and good X (OX1), he will be at point a on the BUDGET LINE (or relative price line) MX. If good X becomes cheaper, so more can be had, his real income increases and he can move to budget line MX2. The combination of goods the consumer prefers is now at, say, b.

However, not all the change is due to increasing real income caused by the fall in the price of good X. Some of it is due to the substitution of the now cheaper good X for others, and this effect is always positive, that is, it is not possible to purchase less of the now cheaper good X after the change to MX2, than when on the budget line MX.

If the consumer's new configuration of goods at b is reduced proportionately, by introducing a hypothetical decrease in income in the form of an inward parallel shift of the budget line to position M2 X3, then the consumer will choose a new position, say, point c; the SUBSTITUTION EFFECT is from X1 to X5, while X5 to X4 is the INCOME EFFECT. See CONSUMER EQUILIBRIUM, INDIFFERENCE CURVE, PRICE EFFECT.

References in periodicals archive ?
A more interesting interpretation of revealed preference theory is that its assumptions and axioms provide a normative theory of what a rational agent should choose given what she does choose.
A Revealed Preference Approach Using Food Consumption" (NBER Working Paper No.
It is yet another illustration of the importance of what economics calls revealed preference over stated preference.
We propose a novel revealed preference approach that allows us to address this shortcoming by separately measuring the intrinsic value of power and the intrinsic value of autonomy.
We look first at the research findings of the revealed preference approach.
Despite America's official commitment to non-proliferation, then, the revealed preference of the foreign policy elite is often for other priorities -- Nato expansion, humanitarian intervention, regime change.
Small Revealed Preference. Revealed preference data complements stated preference data.
In order to measure preferences in the first objective, a discrete choice experiment was conducted, and basic methods from the Revealed preference approach (RP) and the State preference approach (SP) were applied.
Revealed preference theory bracketed the problem of determining what sort of observable would indicate a greater quantity of utility, by instead assuming that well-being or utility was identical with (and fully revealed in) actual choice (Robbins 1932: 139; Samuelson 1938).
Douglas Bernheim & Antonio Rangel, Beyond Revealed Preference: Choice-Theoretic Foundations for Behavioral Welfare Economics, 124 Q.J.
Of course, there is a "revealed preference" argument that if the product is (not) taken up it was perceived to be a positive (negative) net benefit.
There are two simple methods: 1) Revealed preference method; 2) Expressed preference method.