Posted in Finance, Accounting and Economics Terms, Total Reads: 327
Definition: Revealed Preference
Revealed Preference is an economic theory which states that the buying preference of the people is decided after they have already seen many options of products. This theory considers the purchasing behaviour of a customer, and related the demand theory to it.
This theory was given by American economist Paul Samuelson.
Two bundles of goods; a and b, budget is B
This theory tries to understand the consumer preference for a specific bundle of goods and their choices given the budget constraints. For example, if a bundle of goods say 2 mangoes and 3 bananas is preferred over 3 mangoes and 2 bananas, then we say that the first bundle as revealed preference over the second bundle.
One of the criticism of the theory is that in real world, it is not easy to say what consumer chose to discard when he chose revealed preference bundle over the other.