Reservation Price

January 2, 2010

Reservation price or reserve price in microeconomics is the maximum or the highest price a buyer is willing to pay for a service or good. In the same way it is also the lowest or minimum price a seller is willing to sell the good or service. For the buyer the reservation price vary generally in proportion to the disposable income of the buyers. The reservation prices also vary accordingly to the prices of the substitute products, information about the availability of substitute products and the desire of the buyers to possess and purchase the product.


Reservation demand is the name used for the schedule of reservation prices that a seller is willing to sell his products. With the help of reservation prices one can calculate producer surplus or consumer surplus in comparison to the equilibrium price. One can make use of the reservation prices effectively when one is trying to purchase the house or any real-estate property.

The most important basic thing one should keep in mind when a person is thinking in purchasing a home or real-estate property is to selecting the right offers for your home. So one should understand the entire home buying process revolves around making of the right offer. Many experts recommend people that they should analyze and find out the best available home prices by researching in the area. Based on the information garnered one should create the highest price or their own reservation price they are willing to pay for the home.

A reservation price helps a person to bid more efficiently and effectively even by staying with in the range of the budget making the available home prices affordable and convenient. With this careful planning and creation of reservation price for your home purchase helps you and keeps you in better position while you are in negotiations with the seller’s agent or the seller himself when it come to making an offer. This will be of real great help for you.

The following are the steps involved in the basic process of finding the best price for your dream house.
You should calculate and write down the exact affordable amount that you can pay on monthly basis. This should be or may be close to the price you are paying now or wish to pay per month on house costs.
You should calculate insurance and tax costs. You should use a factor of 0.68 for high insurance and tax areas, 0.85 for relatively inexpensive tax and insurance areas, and 0.75 as a standard for rough estimate. One should use this proportions with the amount you are willing to pay every month gives you the affordable loan and P&I payment.


You should calculate the loan term and interest rate. Jot down the interest rate and the number of loans for the years. You can locate appropriate payment terms from the loan payment tables. You can have the table from mortgage lender.

You should now add your available cash to the down payment. This will give the total amount you can comfortably pay for your home.

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Written by Uncle Sam · Filed Under Economics 

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