Calculating willingness to pay (WTP) is a major factor in business. Market demand curves are determined by finding the WTP. A market demand curve establishes how many of a certain item a buyer would purchase at a stated price. Say, for example, you were selling chairs and were seeking chair distributors. To make a profit on your chair manufacturing business, you would require the following pieces of data to determine the WTP and market curve: the price you prefer per to charge per chair and the price a buyer is willing to pay per chair.
Establish the high price you prefer per chair. State your price as $30 per chair.
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Establish the high price your buyer is willing to pay per chair, such as $25 per chair.
Ask the buyer how much he would be willing to pay per chair if he ordered two chairs. Say that price is $24.50, or a deduction of 50 cents per chair.
Create a chart based on this information. List numbers one thru 10 in the left column. Write in the price your buyer is willing to pay per chair next to each number. Write in "$25" next to the "1" spot. Each buyer price is the "WTP". Write in "$24.50" next to the "2" spot. Write in "$24" next to the "3" spot. Continue in this manner. This chart represents your buyer's WTP and the demand curve -- the buyer price per chair and how many chairs, at the stated price, he can buy.
Chart the curve. Write out the WTB numbers on the left-hand, vertical margin -- starting at the bottom and moving up. Write out the number amount of chairs the buyer can purchase in sequential fashion -- starting left and moving right -- at the bottom. Graph these markings to form a grid. Scribble in dots on the graph at each designation where price and amount meet. Link the dots together to see the visual curve.
Things You'll Need
Paper (graph paper)