Both ‘utility analysis’ and ‘indifference curves analysis’ use introspective method or psychological approach to explain consumer’s behaviour and demand.
Theory, propounded by Prof. PA. Samuelson, attempts to explain consumer’s behaviour and consumer’s demand on the basis of observed market behaviour of the consumer in different price-income situation.
Thus, the revealed preference theory provides behaviouristic explanation of consumer’s demand.
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The revealed preference theory is based on the following concepts or elements:
(i) Ordinal utility:
According to Prof. Samuelson utilities are merely comparable and not quantifiable. It means it is based on the concept of ordinal utility.
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(ii) Preference hypothesis:
It means when a consumer chooses a particular combination of goods, say P, out of various combinations available to him in a given price-income situation, then he reveals his preference for the chosen combination and rejects all other combination.
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Therefore, ‘choice reveals preference’. In other words’ choice reveals preference highlights ‘preference hypothesis’. From “preference hypothesis’ one can obtain definite information’s about the preference of a consumer from his observed behaviour in different price-income situations.
(iii) Strong-ordering preference:
The hypothesis of ‘choice reveals preference’ implies strong-ordering. Strong-ordering implies that when a consumer chooses a particular combination, then he definitely prefers the
chosen combinations.
Thus strong-ordering rejects the relation of indifference between various alternative combinations.
(iv) Consistency postulate:
Consistency postulate states that if a consumer chooses a particular combination of goods, say P, rather than B in one situation, then he will not choose Q over P in another situation if both P and Q are available to him in the other situation.
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Thus, revealed preference theory assumes that the consumer’s behaviour is consistent,
(v) Assumption of positive income elasticity of demand.
