A reserve price is a minimum threshold price established by a seller in an auction. This price is typically kept confidential from the bidders. The item being auctioned will only be sold if the final bid meets or exceeds this reserve price.

Reserve Price

A seller's Willingness to Accept (WTA) is influenced by their personal circumstances. For instance, a seller's financial situation can affect their reservation price. Students in greater financial need, for example, might be more eager to sell their used textbooks to afford other books and thus have a lower WTA compared to other students.

Factors Influencing Willingness to Accept (WTA)

The market for used university textbooks exemplifies how market principles operate, from traditional, decentralized interactions to modern online platforms. In past scenarios, transactions relied on direct negotiation between buyers and sellers to determine a price based on individual willingness to pay (WTP) and willingness to accept (WTA), a dynamic similar to the historical grain markets that economist Alfred Marshall studied to create his supply and demand model. Contemporary versions of this market have shifted to online platforms, streamlining the process of connecting student buyers and sellers.

Market for Second-Hand University Textbooks

A supply curve is a graph that shows the number of units of a good that would be offered to the market at any given price, indicating how many sellers are willing to sell at each price point. A key characteristic of supply curves is that they typically slope upward. A distinction can be made between a firm's supply curve, which shows the output for one company, and the market supply curve, which aggregates the output from all sellers in the market. The supply curve is also known as the supply function.

Supply Curve

When an individual decides to sell their own car, they need to choose from several available methods. The context introduces this as a scenario with three potential selling strategies to consider.

Methods for Selling a Privately-Owned Car

Willingness to Accept (WTA) is the minimum price a seller will accept for a good or service. It functions as the seller's reservation price and is an indicator of how much they value the good, as they would prefer to keep the item rather than sell it for a lower amount.

Google

Willingness to Pay (WTP) represents the maximum price an individual is prepared to pay for a good, reflecting their personal valuation of it. This valuation is subjective and can differ significantly among consumers based on factors such as how important they consider the good, their work ethic, and their available financial resources. A consumer will only purchase a product if its price is less than or equal to their WTP. [1, 2, 7]

Willingness to Pay (WTP)

To cite the ebook, use The CORE Econ Team 2023 The Economy 2.0: Microeconomics Open access e-text https://core-econ.org/the-economy/.

To cite a unit, use The CORE Econ Team 2023 The Economy 2.0: Microeconomics Open access e-text https://core-econ.org/the-economy/ Unit [unit number] (url).

CORE Econ - The Economy 2.0: Microeconomics

Willingness to Pay (WTP) is a practical concept for buyers in online auctions, such as those on eBay. A common strategy is to determine the maximum price you are willing to pay for an item and set that as your maximum bid. [1, 5] eBay's automatic bidding system will then place incremental bids on your behalf to keep you as the highest bidder, but only up to your specified WTP limit. [1, 2, 3, 4] You will win the auction only if the final highest bid from all participants is less than or equal to your maximum bid. [1]

Using Willingness to Pay in Online Auctions

An individual's willingness to pay (WTP) for a good is influenced by several personal factors. Using the example of students buying a textbook, these determinants can include how diligently the student works, the perceived importance of the book for their studies, and their personal financial situation for purchasing books.

Factors Influencing Willingness to Pay

Willingness to Accept (WTA)

A demand curve visualizes the relationship between price and quantity demanded by ordering potential buyers according to their willingness to pay (WTP), from highest to lowest. A consumer will purchase a good only if its price is less than or equal to their individual WTP. [5, 8] Consequently, for any given price, the demand curve indicates the total number of consumers whose WTP meets or exceeds that price level. [4] The WTP itself reflects the personal value a consumer assigns to a good, contingent on their available resources. [3]

Learn Before

Related

Learn After