Revealed Preference Theory

 MICROECONOMICS
The assumption implies that preferences are transitive.

In other words, if we have bundles A, B, C, ..., Z, and A is revealed preferred to B, which is in turn revealed preferred to C and so on, then it follows that A is revealed preferred to C through Z. Under these hypotheses, economists are able to chart indifference curves which are employed in many models of consumer theory.

The theory is especially useful in providing a method for analyzing consumer choice empirically. Revealed preference theory deliberately ignores measures of utility and indifference. An empirical utility theory, it superseded cardinal utility in consumer theory.The revealed preference theory is 'behaviourist', while the indifference curve approach is 'introspective'.

1.If one bundle is chosen when another could have been chosen, we say that the first bundle is revealed preferred to second.

2.if the consumer is always choosing the most prefered bundles he or she can afford, this means that the chosen bundles must be preferred to the bundles that were affordable but weren't chosen.

3. Observing the choices of consumers can allow us to "recover" or estimate the preferences that lie behind those choices. The more choices we observe,the more precisely we can estimate the underline preferences that generated those choices.

4. The Weak & Strong Axioms of Revealed Preference are necessary conditions that consumer choices have to obey if they are to be considered with the economic model of optimising choice.

Hal R. Varian, Intermediate Microeconomics, Fourth Edition

Source: P.A. Samuelson,’A note on the Pure Theory of Consumers’ Behaviour’, Econometrica NS.5(1938) Varian, H. (1992) Microeconomic Analysis, Third edition, New York: Norton, Section 8.7