RESERVATION PRICE Meaning and
Definition
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Reservation price refers to the minimum acceptable price that an individual or entity is willing to pay or receive for a certain good, service, or asset. It represents the highest price a buyer is ready to pay or the lowest price a seller is willing to accept in a transaction. The concept of reservation price is central to negotiations and economic decision-making.
In a buyer-seller interaction, the reservation price acts as a point of reference or benchmark for both parties. If the market price is lower than the buyer's reservation price, they may be motivated to purchase the item. Conversely, if the market price exceeds the seller's reservation price, they may be willing to sell it. When the reservation prices of a buyer and a seller coincide or overlap, a transaction can occur.
The reservation price is influenced by various factors such as the individual's preferences, needs, available alternatives, and the perceived value or utility of the good or service being exchanged. It can also be influenced by external factors like market conditions, competition, and supply and demand dynamics.
Understanding and evaluating reservation prices are crucial in negotiations, as they determine the potential outcome and whether an agreement can be reached. Negotiators often aim to uncover the other party's reservation price to gain an advantage and achieve a favorable deal. Additionally, reservation prices play a significant role in determining the equilibrium price in a market, facilitating the efficient allocation of resources.
Etymology of RESERVATION PRICE
The word "reservation price" does not have a specific etymology because it is a combination of two separate words.
"Reservation" comes from the Latin word "reservatio", which means "keeping back" or "reservation". It originally referred to the act of setting something aside for a specific purpose or saving it for future use. In economic terms, a reservation can refer to setting aside resources or goods for later use.
"Price" comes from the Old English word "prys", which means "value" or "price". It refers to the amount of money or goods that is exchanged for a product or service.
When these two words are combined, "reservation price" refers to the minimum price at which an individual or business is willing to buy or sell a product or service. It represents the value or worth that someone places on a particular item. The term is commonly used in economic theory and negotiation contexts.
