The course of development of the pure theory of demand would describe revealed preference theory as a move from psychological to behaviouristic explanation of consumer’s behaviour in market. The utility theory was purely subjective. It sought to explain observed consumer behaviour in terms of motivation and psychological valuation.
The indifference curve analysis released the theory of consumer’s choice from psychological implications to some extent, but it did not explain the observed behaviour of the consumer. The indifference curves continued to remain a sort of psychological postulate.
The revealed preference theory as the third root of the logical theory of demand enunciated the demand theory from observed consumer behaviour. It was the first attempt to formalise consumer’s behaviour from market observations alone.
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This theory has gained some advantages over the two alternative formulations. It frees the consumer theory of the vestiges of psychological and introspective analysis. It also drops ‘utility maximisation’ and ‘continuity’ assumptions making rationalisation of consumer behaviour less difficult than in the other two models. It is based on simpler and more realistic assumptions.
Commenting on the earlier two theories of demand, Samuelson remarks, “for just as we do not claim to know by introspection the behaviour of utility, many will argue we cannot, know the behaviour of ratios of marginal utilities or of indifference directions”.
Further, “The introduction and meaning of the marginal rate of substitution as an entity independent of any psychological, introspective implications would be, to say the least, ambiguous, and would seem an artificial convention in the explanation of price behaviour”.
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The propagator of the indifference curve analysis J.R. Hicks himself admitted in his later work, ‘A Revision of Demand Theory’ that “the most awkward of the assumptions into which the older theory (i.e., the indifference curve theory) appeared to be impelled by its geometrical analogy was the notion that the consumer is capable of ordering all conceivable alternatives that might possibly be presented to him, all the positions which might be represented by points on his indifference map. This assumption is so unrealistic that it was bound to be stumbling block”.
The revealed preference theory based on behaviourist approach is no doubt an advance over the utility and the indifference curve approaches of studying demand. It gives a direct way to the derivation of the demand curve, which does not require the use of the subjective concept of utility or indifference curves.
The theory can prove the existence and convexity of the indifference curves under weaker assumptions than earlier theories. It also provides the basis for the construction of index numbers of the cost of living and their use of noticing changes in the consumer welfare, when prices change.