Discussion on the Economic Implication of Decision to Purchase a House - Essay Example

Economics Purchasing a house is an economic decision that requires rationality. A decision to purchase the house can therefore be analyzed using theprincipals of economics. Reaching an appropriate decision on whether to purchase a house depends on the implications of the principals of the ten economic principals. Because of rationality in making economic decisions people often consider the cost and the benefit of their decision. In most cases, people will make an economic decision anticipating a gain (Hirschey, 2009). When purchasing a house I will expect a gain of value, my decision will therefore be based on the difference between the cost incurred to obtain the house and its value. This essay will give a discussion on the economic implication on my decision to purchase a house. Several principals among the ten economics principals will directly influence my decision towards buying the house. Firstly, people face tradeoffs. This is the first principal that I will encounter in the process of making the purchase decision (Slembeck, 2007). This principal implies that one has to give up something in order to acquire something else. According to this principal, I will need to give up my money in exchange to the house. I will also need to give up the purchase of other items that I need most such as a new car in order to acquire the house. Lastly, after acquiring the new house I will have to give up living in my old house in order to occupy the new house. Rational people think at the margin, this is the second economic principal that I will encounter when analyzing my decision to purchase the house (Slembeck, 2007). This principal implies that a rational decision is based on the difference between marginal benefits and cost. The principal proposes that an economic decision will only be realized if the marginal benefits exceed the cost. When making the decision to buy a house I have to evaluate the difference between the value of the house and its cost. I also have to evaluate benefits of owning the house in relation to the missed opportunities such as owning a car. The cost of something is what you give up to get it. When buying a house I will need to evaluate the difference between the cost of the house and the expected value or benefits from the house (Slembeck, 2007). When buying the house I need to evaluate how the cost of the house compares to the cost of missed opportunities. Finally, people respond to incentives, this principal will be major influence when making the decision (Slembeck, 2007). This means that my decision will tend to follow incentives offered by the different sellers in the market. According to the principal, I will consider purchasing the house from the seller who offers the best discount. Marginal benefits are the additional utility or satisfaction that a person derives from the consumption of an additional unit of a particular commodity. On the other hand, the marginal cost refers to the opportunity cost of acquiring an additional unit of a particular commodity. In the cases of purchasing the house, marginal benefits will refer to the satisfaction derived from a second and subsequent consumption of a commodity (Hirshleifer, Glazer, & Hirshleifer, 2005). The marginal benefit of a house diminishes steadily after acquiring the first unit this is because a person cannot live in two houses simultaneously. This implies that people will tend to spend their money to acquire other items after acquiring their first house. Similarly first time homebuyers will consider their first house as an additional unit. In this case, the house will have a higher marginal benefit that compares well with the missed opportunities. The marginal cost of an item refers to the opportunity cost incurred from acquiring an extra unit of a particular commodity. The opportunity cost of a house is therefore the cost of missed opportunities resulting from acquisition of a second and subsequent house. The marginal cost of a house increases steadily after acquiring the first house since a person can only live in one house at a given time. After acquiring, the first house people will consider acquiring other commodities instead of additional house. This implies that purchasing a house after the first purchase has a high opportunity cost. First time house buyers also need to consider the marginal cost of acquiring a new house. A house is a basic need and therefore the first house usually has a low marginal cost. According to the economic principal of marginal benefits that exceeds marginal cost, a decision to purchase the house will only be realized if the marginal benefits exceed the marginal cost. I will therefore consider buying the house if its marginal benefits exceed its marginal cost. I will therefore be required to evaluate satisfaction resulting from owning a house and the satisfaction that I would acquire from owning other alternative items such as a new car. Because a house is a necessity, there is a likelihood that my decision will tend to favor the purchase of a new house. The economic strength of a country refers to the people’s purchasing power and financial security. A strong economy will be characterized by increased business activities, this is because people in such economies have the ability to purchase commodities brought into the market. Strong economies also have financial security. This means that such economies are able to withstand crises related to economic meltdown. A decision to purchase a house is of economic importance and hence the overall economic strength will play an important role in my decision. The strength of the economy will be demonstrated in purchase decision through marginal costs and benefits. A strong economy has people with high purchasing power and financial security. Purchasing a house is a major decision since making a wrong decision will cause long-term financial implications. An analysis of marginal cost and marginal benefits will enable me to realize an appropriate decision. High purchasing power resulting from a strong economy implies that buyers have the capacity to buy most commodities in the market. Buying a house in a strong economy implies that I have the capacity to buy most houses in the real estate market. In a strong economy, I am also capable of buying a second and subsequent house after obtaining the first house. Although the marginal benefit of a house diminishes steadily after acquiring the first unit. The diminishing of the marginal benefit of a house is independent of a person’s purchasing power. The strength of the economy will therefore have no implication on marginal benefits. Marginal costs on the other hand relate to the cost of missed opportunity following a purchase decision. In a strong economy, people have increased purchasing power. This implies that in a strong economy I will be able to purchase other items after purchasing the house. In addition to people’s purchasing power, strong economies are characterized by financial security. This implies that in a strong economy purchasing a house has little implication on one’s financial status (Bade & Michael, 2001). A strong economy therefore increases people’s ability to take risks. The ability to take risks implies that I am capable of making a financial decision without many considerations on its financial implications. Increase of purchasing power and ability to take risks lowers the opportunity cost associated with a particular economic decision. This implies that my decision to purchase a house has little implication on my financial capabilities and hence I am capable of acquiring a second and subsequent house without missing many opportunities. A strong economy will therefore lower the marginal cost while a weak economy will increase the marginal cost. Domestic economy refers to the process of production consumption and distribution of commodities that satisfies human needs within a country (Hirschey, 2009). Domestic economy establishes a formal relationship between people living in a country. This relationship is enhanced through their daily activities of production and consumption. The economy of a country has the same status as the relationship between people living in a country. Good relationship among people improves their interactions and optimism. Optimistic people are ready to take risks through economic venture. On the other hand, a country with increased interactions will have increased business activities. A country with a bad economy will have people with loose relationships, in such a country people will have little interactions resulting into a reduction in business activities. People in countries with poor economies will be unwilling to take risks and this will lead to a reduction in investment. The state of a country’s economy will therefore imply its economic strength. International trade plays an important role in determining the economy of a country. Through international trade a country obtains commodities that cannot be produced in the country and at the same time export its surplus products. International trade therefore enhances specialization in production within a country. Similar to the domestic economy international trade enhances good relationship within countries this ensures continued supply of commodities in a country and the availability of a continuous market for a country’s products. Although international trade is important to a country not all countries realize the benefits of international trade. This explains the existence of favorable and unfavorable international trade. International trade is considered favorable to a country if the country exports exceed its imports. A country with favorable international trade is likely to have a stronger economy as compared to a country with unfavorable international trade. The strength of a country’s economy will therefore depend on the nature of its domestic economy and international trade. The strength of a country’s economy influences making of economic decisions. Economic strength of a country however influences large-scale decision-making and it has little or no effects at economic decision made at a personal level. On the other hand, economic principals affect decision making at a personal level. My decision to buy the house was therefore based on implications of economic principals more than the economic strength of the country. Conclusion Economic principals are rules that determine how a country operates or how it is expected to operate. Rational people think at the margin, the cost of something is what you give up to get it and people respond to incentive are the main economic principle that influenced my decision to purchase the house. The difference between the marginal cost of a house and its marginal benefits played a major role in the purchase decision. The economic strength of a country has no implications on marginal benefits. On the other hand, economic strength is related inversely to marginal cost. Favorable domestic economy and international trade increase a country’s economic strength and hence determines people’s purchasing power and ability to take risks. The implication of economic principals influenced my decision to purchase the house more than the implications of the country’s economic strength. References Bade, R. Michael P. (2001). Foundations of Microeconomics. New York: Addison Wesley Hirschey, M. (2009). Fundamentals of Managerial Economics 9th Ed. Boulevard: Cengage Learning. Hirshleifer, J. Glazer, A. & Hirshleifer, D. (2005). Price theory and applications: Decisions, markets, and information. London: Cambridge University Press. Kalb, I. (1993). Structuring your business for success. New York: K & A press. Slembeck, T. (2007). Principles of Economics. Retrieved from http://www.slembeck.ch/principles.html Read More