Revealed Preference Theory

Dr Chiaki Hara (University Lecturer in Microeconomics and Fellow of Churchill College)

Saturday, 06 June, 1998; 7:00-9:00pm

Seminar room, Darwin College

The purpose of this talk is to give a brief introduction to a topic in economic theory, called "revealed preference theory".
The standard approach in economic theory is to model a consumer as having some preferencre (taste) over choices of quantities of goods to be consumed and choosing the combination of quantities of goods that is most preferable among those affordable. This approach allows economists to predict how a consumer's choices and welfare are affected by changes in economic environments.
An alternative approach is to diregard preferences that a consumer might have and model a consumer simply as a function, called the demand function, which assigns quantities of goods chosen to, say, prices of those goods. This approach has an advantage over the standard one, in that this one is not based on conumers' preferences, which are not observable in markets.
The most important result in revealed preference theory states that if the demand function satisfies some conditions, which are thought to be natural requirements for human choice behaviour, then there must exist a preference, often a unique one, such that the demand function actually coincides with the behaviour of the consumer with that preference. This result means that an underlying preference can revealed by the demand function, from which the term "revealed preference theory" is derived. In this sense, the two approaches are in fact equivalent, although they seem to be quite different at first sight.