Revealed Preference Theory is considered a major break-through in the theory of demand due to the following reasons:
Reasons
1. Behaviouristic method:
This theory explains the price-demand relationship from the observed behaviour of the consumer in different price- income situations.
While the earlier two theories (Marshall’s and Hick’s Theory) were based introspective and psychological explanation of consumer behaviour.
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2. Scientific approach:
Behaviouristic method is more scientific and it cannot go wrong because it is based on actual observed behaviour of the consumer.
Psychological explanation of consumer behaviour can go wrong but behaviouristic explanation can’t be wrong.
Samuelson and others who think alike have argued that behaviouristic method is the only correct way of explaining consumer demand.
Which method, whether psychological or behaviouristic, is more appropriate is a matter of personal thinking and liking, operationally both approaches reach on similar conclusions?
3. No assumption of rationality:
Prof. Samuelson has dropped the unrealistic assumption of rationality. It is based on consistency postulate.
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The consistency postulate is more realistic and is in consonance with the real world behaviour of the consumer.
4. Dropped the assumption of continuity:
Indifference curves are continuous curves on which are lying all conceivable combinations, whether they are realistic or not.
But Prof. Samuelson has dropped the assumption of continuity and concentrates only on the available combinations of goods in market.