Consumer preference plays a crucial role in shaping the economy. It forms the basis of production activities as the consumer’s preferences influence the producer’s opportunity function. The producer in order to maximize his profit , always want to know the preferences of the consumer , as the consumer preferences affect the demand, so that he can always focus on the particular product , which the consumer prefers. The Government policies are also influenced by the preferences. Therefore, it is crucial to determine consumer preferences. In order to know about consumer preferences, some methods and theories are required. Some of the theories introduced were:
* Utility theory: Utility has been described as the measurement of the satisfaction that an individual get, by consuming a combination of goods. The utility associated with each combination, allows ranking the combinations in a specific order. Assuming the consumers to be insatiable, the consumer will prefer the higher ranked combination to other combinations with lower utility. The utility concept is divided into two kinds of utilities, ordinal utility which provides us with the ranking of combinations of goods and cardinal utility , which measures the difference in amount of satisfaction , consumer gets by giving preference to one combination of goods over another . Assuming the consumers to be insatiable, the consumer will prefer the higher ranked combination to other combinations with lower utility. The cardinal measurability of utility has been criticized, as on the terms that in reality utility or satisfaction cannot be measured cardinally, the satisfaction obtained from one combination of productions can only be compared to the satisfaction obtained by consuming another combination of products. * The indifference curve approach, was then introduced which is based on preference hypothesis , that is if the consumer is provided with various combination of goods, he can put them or order them according to preferences. This approach overrules the concept of cardinal meausarability of utility and proves all the concepts proved by cardinal utility without using cardinal utility. It is based on the concept of ordinal utility, as is based on the concept of ranking and comparing different combination of goods. If two combinations are provided , either the consumer will prefer one over another, or will be indifferent. The points present on the indifference curve gives us those combinations which provide with the same amount of satisfaction. And the indifference maps (all indifference curves) allows us to compare the satisfaction assosciated with each combination. The higher the indifference curve , higher the satisfaction assosciated with it.So according to the budget constraint, the consumer will choose the combination on the highest indifference curve. (Assuming, consumer always prefer more over less). These theories assumes and introspects the reaction and behavior of the individual to different price-income situations. There is no empirical basis of this theory. They are not based on the behavior of the individual in the market, they just predict the preference on psychological basis. A theory based on the actual behavior of the individual in the market was required. Thus the “revealed preference hypothesis” was introduced, which is based on observing the behavior of individual in the market and on the basis of the choices made by them their preferences are revealed i.e. when an individual chooses a particular combination of goods over all other available goods, on a particular price-income situation, he is revealing his preference of the chosen combination over available combinations. This hypothesis with certain axioms, forms revealed preference theory which is explained in next chapter.
Chapter 2: Revealed Preference Theory
This theory claims to be not based on the concept of utility and with its own axiom will prove all the concepts...