Reservation price
Encyclopedia
In microeconomics
, the reservation (or reserve) price is the highest price a buyer is willing to pay for goods or a service; or; the smallest price at which a seller is willing to sell a good or service. Reservation prices are commonly used in auction
s.
Reservation prices vary for the buyer according to their disposable income
, their desire for the good, and the prices of, and their information about substitute good
s. Reservation demand is a name for the schedule of reservation prices at which a seller would be willing to sell different quantities of the good in question.
The reservation price is used to help calculate the consumer surplus or the producer surplus with reference to the equilibrium price.
Just as a consumer has an incentive to search
for a low price when purchasing a good, a worker has an incentive to search for a high wage when looking for a job. The lowest wage the worker is willing to accept is that worker's reservation wage
.
In negotiation
, the reservation price is the point beyond which a negotiator is ready to walk away from a negotiated agreement. Taking a typical business negotiation as an example: a seller's reservation price is the least amount (the minimum) or bottom line the seller is prepared to accept. A buyer's reservation price is the most amount (the maximum) or top line that the buyer is willing to pay. Reservation price is often referred to as the ‘walk away’ point.
In finance
, the reservation price, also called the indifference price
, is the value at which an investor would be willing to buy (or sell) a financial security given his or her particular utility function.
Microeconomics
Microeconomics is a branch of economics that studies the behavior of how the individual modern household and firms make decisions to allocate limited resources. Typically, it applies to markets where goods or services are being bought and sold...
, the reservation (or reserve) price is the highest price a buyer is willing to pay for goods or a service; or; the smallest price at which a seller is willing to sell a good or service. Reservation prices are commonly used in auction
Auction
An auction is a process of buying and selling goods or services by offering them up for bid, taking bids, and then selling the item to the highest bidder...
s.
Reservation prices vary for the buyer according to their disposable income
Disposable income
Disposable income is total personal income minus personal current taxes. In national accounts definitions, personal income, minus personal current taxes equals disposable personal income...
, their desire for the good, and the prices of, and their information about substitute good
Substitute good
In economics, one way we classify goods is by examining the relationship of the demand schedules when the price of one good changes. This relationship between demand schedules leads economists to classify goods as either substitutes or complements. Substitute goods are goods which, as a result...
s. Reservation demand is a name for the schedule of reservation prices at which a seller would be willing to sell different quantities of the good in question.
The reservation price is used to help calculate the consumer surplus or the producer surplus with reference to the equilibrium price.
Just as a consumer has an incentive to search
Search theory
In microeconomics, search theory studies buyers or sellers who cannot instantly find a trading partner, and must therefore search for a partner prior to transacting....
for a low price when purchasing a good, a worker has an incentive to search for a high wage when looking for a job. The lowest wage the worker is willing to accept is that worker's reservation wage
Reservation wage
In labor economics, the reservation wage is the lowest wage rate at which a worker would be willing to accept a particular type of job. A job offer involving the same type of work and the same working conditions, but at a lower wage rate, would be rejected by the worker.An individual's reservation...
.
In negotiation
Negotiation
Negotiation is a dialogue between two or more people or parties, intended to reach an understanding, resolve point of difference, or gain advantage in outcome of dialogue, to produce an agreement upon courses of action, to bargain for individual or collective advantage, to craft outcomes to satisfy...
, the reservation price is the point beyond which a negotiator is ready to walk away from a negotiated agreement. Taking a typical business negotiation as an example: a seller's reservation price is the least amount (the minimum) or bottom line the seller is prepared to accept. A buyer's reservation price is the most amount (the maximum) or top line that the buyer is willing to pay. Reservation price is often referred to as the ‘walk away’ point.
In finance
Finance
"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...
, the reservation price, also called the indifference price
Indifference price
In finance, indifference pricing is a method of pricing financial securities with regards to a utility function. Also known as the reservation price or private valuation. Particularly the indifference price is the price that an agent would have the same expected utility level between exercising a...
, is the value at which an investor would be willing to buy (or sell) a financial security given his or her particular utility function.