Making a Major Purchase - Assignment Example

I. Discuss which principles of economics directly relate to your purchasing decision  Before making any purchases, an individual has to evaluate themarginal benefits that could be derived from the said purchase compared to the marginal costs or the efficiency of cost in acquiring an additional unit. Opportunity cost has also to be considered or the value that will be given up in exchange for the intended purchase. For this case, the economic principle that will be used is the marginal benefit compared to its opportunity costs. The marginal cost is not applicable given that the industry of the intended item for purchase is distorted due to the recent economic crisis not to mention that consumer’s typically needs only one house. II. Item considered for Purchase: House The need for shelter is a necessity. Such, individual has to buy a house at some time or another. The bigger question would be when and will it be right time to buy it. The act of purchasing a house is relatively infrequent and generally constitutes an individual or a family’s “single most important investment and expenditure (Levy et al., 2008 pg. 253). To make the analysis clearer in this case, let us assume that the buying decision to purchase will be made on cash. Buying on cash can also demonstrate clearly the economic principles behind making such decision or indecision. To illustrate further these economic principles, let us assume that the buyer is a typical middle class with a regular job and regular income that making a purchase would require a serious evaluation on his or her part. III. Marginal benefits and Marginal Costs Associated with the Purchase Before making a decision to buy a house (on cash), we have to consider if what we have to give up (opportunity cost) is more than or worth of what we are going to get (marginal benefit). A house is a need. It shelters us from the vicissitudes of the weather and the inclemencies of the storm. It provides a place for rest and recreation where we can grow our families and live as a person. But before getting those benefits, we can consider what we have to give up. This consideration is very important because purchasing a house is the most expensive purchase that we will make. In addition, we have to be careful in letting go of our scarce resources especially that we are still in the process of recovery. IV. The Strength of the Whole Economy in Relation to the Marginal Benefits and Costs The economy has to be considered in making that purchase. There are two things that should be considered before making that purchase; first, is the economic condition of the economy as this will determine the price of the house whether it is the time to make the purchase and this will also determine the individual’s capacity to pay. The economy is still in the process of recovering and it may be slow certainly not entering into a recession as observed by Fred Smith, the Chairman and Chief Executive Officer of FedEx Corp. (FDX) (Del Giudice, 2011). It also came from “a subprime housing crisis that it cast a dark shadow over the United States “the sub-prime housing crisis casting a dark a shadow over the United States. As a result, house prices went down and buyers can buy houses for much less (Times Colonist, 2008). The benefits of owning a house remains the same but the cost significantly went down. The economy may be slowly picking up but certainly the prospect is not as gloomy during the financial crisis. V. The Domestic Economy and International Trade The economy is painfully slow in recovering. Companies are also very conservative in spending and expansion that even if there is enough money to make it recover, investors are still holding back. This explains why the recovery is slow. There are good indicators that the domestic economy could improve; although it is severely criticized, government is aggressive in its spending (Obama’s Stimulus Package) which could increase the GDP and net income. The $2 savings of company may also be used for expansion when the time would be right for investors and it can give a boost to the domestic economy. International Trade on the other hand can affect an individual’s income. When the balance of trade increases, this would also increase the GDP which will translate to the individual’s increased of purchasing power as his or her net income also increases. VI. Should We Buy or Not to Buy A House Now? Given the conditions enumerated above, it would be good time to buy a house today. There are several good reasons for this that could outweigh the risk. First, the housing industry is now priced cheap that we could get more with our dollars. The marginal benefits increases as our dollar can now buy a bigger and more comfortable house. The same house that we are about to purchase would require more dollars or higher opportunity costs if a buyer is going to wait for the economy finally recover as more people would be buying by then that will drive the price of the house up (law of supply and demand). There is a general air of caution in the economic atmosphere to hold back buying. But this perceive fear is artificial because we already in the recovery period (although slow). There are monies laying around amounting to $2 Trillion that is just waiting for the right time. U.S. economy will recover eventually. So a buyer has to make a purchase now before the house will get more expensive when the economy is in full recovery. VII. Conditions That Could Lead to A Different Decision If the economy is still in recession, the buyer should exercise more caution in buying a house and should wait for better times before letting go his or her precious resources. Recession meant uncertainty and the company that the buyer works for may be downsizing that he or she could be affected or worst, it might fold. Second, if the buyer has been recently retrenched due to the cost saving measures he or she previously worked for, it not advisable to make any significant purchases until he or she finds a new job. References: Bloomberg, John Detrixhe (2010). Billion-dollar corporate cash hoard reflects concerns of borrowers. Financial Post online. Retrieved at Retrieved on October 03, 2011. Del Giudice, Vincent (2011). Economy ‘Is Not Entering a Recession,’ FedEx’s Smith Says on Fox. Bloomberg online. Retrieved at Retrieved on October 03, 2011. Levy, Deborah; Murphy, Laurence; Lee, Christina K. C. Influences and Emotions: Exploring Family Decision-Making Processes When Buying a House. Housing Studies, March 2008, v. 23, iss. 2, pp. 271-89 Sandbrook, Dominic (2011). Could this be the end of Americas economic supremacy? Mail Online. Retrieved at Retrieved on October 03, 2011. Times Colonist, (2008). 12 questions to ask before buying U.S. real estate With the sub-prime housing crisis casting a dark a shadow over the United States, many Canadians are searching for hot deals on American properties. Househunting.ca. online. Retrieved at < http://www.househunting.ca/vacation-homes/story.html?id=a2d5b387-8bca-4df4-89b6-b362b97c8336> Retrieved on September 30, 2011. Read More