Consumption Theory in Terms of Revealed Preference

TLDR

The economic theory of consumer behavior can largely be built on revealed preference, where comparing the costs of different goods at varying price ratios reveals consistent preference patterns. I aim to present an alternative demonstration of the result that a locus equivalent to an indifference curve can be defined from judiciously selected price‑quantity situations. The proof is direct but requires more mathematical reasoning than the previous one. The result shows that with enough judiciously selected price‑quantity situations for two goods, one can define a locus that is the precise equivalent of the conventional indifference curve.

Abstract

A DECADE ago I suggested that the economic theory of consumer's behaviour can be largely built up on the notion of revealed.preference . By comparing the costs of different combinations of goods at different relative price situations, we can infer whether a given batch of goods is preferred to another batch; the individual guinea-pig, by his market behaviour, reveals his preference pattern-if there is such a consistent pattern. Recently, Mr. Ian M. D. Little of Oxford University has made an important contribution to this field. 1 In addition to showing the changes in viewpoint that this theory may lead to, he has presented an ingenious proof that if enough judiciously selected price-quantity situations are available for two goods, we may define a locus which is the precise equivalent of the conventional indifference curve. I should like, briefly, to present an alternative demonstration of this same result. While the proof is a direct one, it requires a little more mathematical reasoning than does his.