micro - demand, willingness to pay Flashcards
What is willingness to pay, what is its connotation and what determines wtp?
This is the maximum amount of money the buyer is willing to pay which is not the same as price.
Willingness to pay = v
It is determined by the rational buyers preferences and income (ability to pay)
What are uses of wtp but must be connsidered?
1) To determine a buyers behaviour (demand)
2) To assess the value of the good to the buyer, and hence see how much the gain is as when trading the value is converted to price.
It cant be forgotten that we must recall that the wtp is bassoon the consumers income.
What is the reservation price and what is the connotation?
This is the cost (c) that could be equal to the unit cost to produce the good.
The another way to call it is the costs so the connotation for cost is (c)
What is the equation to find the benefit from trade and what is it independent from?
The benefit form trade is found from adding the consumer surplus and profit together, this is independent from price because the equation cancels p out.
(v-p) +p-c) = v-c
What is a rational buyer?
A rational buyer is when they purchase when the willingness to pay is greater than the price and is indifferent to purchasing or not when v=p
What is diminishing marginal utility and how do you find the wtp for the nth unit?
Diminishing marginal utility is when the purchase of each additional/ successive unit of gain leads to an ever-smaller increase in subjective value.
The v for the nth unit is calculated from : v(n) - v(n-1)
What is the optimal purchase rule?
The optimum purchase shows the optimal behavioural rule that is to continue purchasing one more unit as long as marginal wtp is greater than the price. The optimal purchasing point is when p = marginal utility
