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 ?
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.
Reck, Revealed Preference Analysis with Framing Effects 1 (working paper 2017), https://pa-pers.
There are two simple methods: 1) Revealed preference method; 2) Expressed preference method.
The first is to extend the analysis of consumer behaviour and revealed preference to allow for preference heterogeneity, many goods and taste change.
Alternatives and revealed preference / The book's central argument is that sweatshop workers are paid poorly because their productivity is low and their alternatives are even worse.
By revealed preference we know that the secondary private sector has expanded dramatically at the expense of the secondary public sector in the last thirty years in Cyprus," Alexander Michaelides, head of the finance department at the London based Imperial College, said in an emailed interview.
The above point may be put differently by noting that the synchronic money pump relies on the dubious Weak Axiom of Revealed Preference (WARP), sometimes invoked by decision theorists, whereby if any choice situation exists in which one chooses a rather than b, then in no choice situation may one choose b when a is also available.
Which is to ask, do we trust revealed preference as an arbitrator of consumer welfare and a guide for public choice?
First, we were not able to use a revealed preference approach and had to rely on stated preferences regarding hypothetical questions.
It's a useful concept, and it goes like this: stated preference is what people say that they want (or want to do), and revealed preference is what they actually do, especially when they don't think that anyone is keeping track.
When they are available, revealed preferences are typically preferred to stated preferences, although this is not an absolute: a high-quality stated-preference study may be chosen over a lower-quality revealed preference study.
This is revealed preference, I don't have political ambitions.