Everything about Reservation Price totally explained
In
microeconomics, the
reservation (or
reserve)
price is the maximum price a buyer is willing to pay for a good or
service; or, conversely, the minimum price at which a seller is willing to sell a good or service. Reservation prices are commonly used in
auctions.
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 goods.
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.
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