Introduction
The decision to purchase has in many occasions proved to be tricky and needs a sizeable outlay. This decision could have long-term consequences as far as finances of the buyer are concerned. Many people often opt to buy homes without taking into consideration the real financial impact. It’s pertinent to note that buying a home should not be impulsive. In some instances people have reacted to incentives and the expenses as a factor when sourcing for homes. There are several principles that have played a significant role in decision making particularly in the purchase of homes.
Principles of Economics
The first principle to consider is the tradeoffs. In a normal business environment, there are no free gifts (Mankiw, 2008a, p. 128). A decision is usually made based on trading one product for another. For one to get a home, they have to spend some money in exchange.
The second principle is the fact that there is need to give up some costs to acquire the product. Somebody is supposed to understand his/her needs to be able to make some comparisons about the prices of the house. In addition to these it is better to consider the benefits that come by acquiring the product and the best alternatives that are available. In business language, this is referred to as opportunity cost – The Enjoyment foregone to get the house.
Considering the fact that human beings tend to think rationally at the margins. As the third principle, I am rational enough to consider marginal changes in my decisions (Mankiw, 2008a, p. 128). The marginal changes are very important to consider because they guide individuals in reaching better decision as one is able to use the increment adjustments on the changes. Making the comparisons of marginal benefits and the marginal expenses is necessary for the decision. When marginal benefits surpass the costs, that alternative is considered as the best (Mankiw, 2008a, p. 128).
The fourth principle is that people tend to respond when they are presented with incentives. This means that when there are some marginal, changes in the benefits to be enjoyed or the cost comes down, the response is likely to be positive (Torgerson & Spencer, 1996, p. 36). Generally I would go for the next best alternative when the benefits are worth more than the costs. This means that I would have to assess whether the house is a decent home, with water, electricity, secure and accessible to the social amenities like health facilities and school or water and sewage system. Sometimes the house could be cheap but the cost of getting to work, accessing clean water and school could be way much higher (Torgerson & Spencer, 1996, p. 36).
Marginal Benefits/Costs related to my Purchase Decision
Consumer decisions are determined from the way they interact with the environment around which includes the government policies, prices set by sellers, the trend in the market and the perceived benefit of gaining the product. Gaining a new home has a lot of marginal benefits that are involved while on the other hand there is a lot of costs that will be suffered (Mankiw, 2008a, p. 129). Willingness to give up something to get that extra unit of another product defines the benefits that one can give up. I clearly understand that when I buy a new house I will have a roof over my head, my children will have a home and I may be able to raise a very happy family. However, this calls for hard work to be able to get that extra money to save for the purchase. It will also require committing a lot of time to the job thus limiting my leisure time (Mankiw, 2008a, p. 131). I may get exhausted because of too much work and sometimes be forced to forego some happy moments in life like enjoying holidays just because I have to save for the house. Save for the difficulties I will face dealing with my limited budget and the possible incriminating consequences of probably failing to repay mortgages and so on (Mankiw, 2008a, p. 131).
After making critical comparisons between the financial obligations faced after purchasing a home I will also look at the costs that I will have to pay with regards to the decision to purchase the house (Torgerson & Spencer, 1996, p. 36). I believe it is appropriate that I go ahead and get the house. In addition to these I believe that handling insurance costs, costly upkeep and loan interests is worth the gains of a decent home, no more rent and more room as well as security (Mankiw, 2008a, p. 131). Going a head with the decision will mean that the papers will have to be signed and that there will be limited changes of backing off after the assent and closure of the deal.
Strength of the Economy as a Whole on Marginal Benefits/ Costs
It has been a very common feeling for most people that when the country is suffering some kind of recession, it would cost more money to purchase a house than during periods of economic prowess. When the government removes tax deductions on the mortgage the cost of acquiring a house falls drastically (Mankiw, 2008b, p. 111). As a result, the buyers like me will tend to weigh that the costs which should not be far much higher than the marginal benefits. There are several undertakings that the government can undertake which will critically affect my decision to purchase a house.
It’s believed that when the government prints a lot of money to solve the problem of recession it also lowers the interest rates. When this happens, then the average citizen will spent very little cash in repaying interests and also on making large purchases. Among these purchases that can be made affordable include houses (Mankiw, 2008b, p. 111). During this time the demand of a house is likely to go up as the rules of the market state, when there are many suppliers, the prices will fall even when the market is high because of the competition. I find that this it is therefore very attractive to invest in a home.
On overall assessment the purchase of homes has been declining steadily during periods of recession. However, this is not the reason or an indicator that anyone who needs to make purchases should base on (Mankiw, 2008b, p. 111). Purchasing a new house that is presently undervalued in the markets can always turn out to be a smart decision. But just as this market is not affected by the recession badly, homes are among the properties that are able to hold their value steadily than any other property (Mankiw, 2008b, p. 111).
Another critical aspect that determines decision making is the prices and taxation. In an extreme edge, flat tax has acted as a pure tax for consumers which in some occasions replace the standardized and single deduction. Everybody’s salary except the deduction is taxed on a flat rate basis (Mankiw, 2008b, p. 111).
Comparing value added tax on business and salaries means that consumption is the only thing being charged. However the flat rate is considered to have eliminated about three different types of taxes. As consumers buy products they are supposed to pay tax which can be said to be value added (the difference between prices and inputs). It’s important also to note that this difference between the buying price and the import obtained from others are included in the salaries and wages (Mankiw, 2008b, p. 113).
Removing the mortgage interest rate deduction alone results in reduced prices of houses. The extent of the reduction depends on the owners of the housed marginal tax. It is imperative to note that the fractional equilibrium adjustment in tax code can be useful in making estimations as far as losses that home owners incur are concerned (Mankiw, 2008b, p. 113). The tax calculations are derived from constant rates of interest. With flat tax rates in play there are several factors in play that might alter the equilibrium interest. Though there won’t be any mortgage deduction of interest, there will be less taxation on the interest and the capital earnings. A direct effect will result in reduced rates just like in the case of tax free situations (Mankiw, 2008b, p. 113). This could be at least 1-2% lower than the return on investments.
Since the world is not just simple, there are other factors that need to be put into consideration, insofar as capital is expected to be mobile the world over, the rates of interest will not decline, or not to at least 2%, as small change ion the structure may not impact the rates at world level (Mankiw, 2008b, p. 113). Changing the tax code will result in result in a shift in the investment types probably from home trade to other business.
Flat taxation taxes that future and as a consequence, threw will be a reduction in the prices for products for there future and also increased saving. Somehow this impact will be limited since saving and more gaining are not taxed. With regard top the degree to which housing reduced, wealth effect will see wealth being transferred from older people to the youthful persons. This means that young people can hence be able to buy house at cheaper costs (Torgerson & Spencer, 1996, p. 36). Younger people are also able to save a lot than the older ones.
Strength of Economy
Role of Domestic and International Trade
Domestic trade and the involvement in the international trade has dad a very big impact on the strength of individual states. This is has been evident in the US and it’s indicated by the value of its current. Over the past decade, the dollar has not been very stable (Baumol & Blinder, 2008, p. 67). It has been declines in value as compared to other international currencies. This has lead to detrimental results on the US consumers and also the companies that import from foreign market. Other players in the global markets are the ones that are benefiting. As the US dollar remains the point of reference of the international currencies, its values is very important on the international market (Baumol & Blinder, 2008, p. 67).
When there are some economic factors that can stimulate or signal recession in the domestic market of the US and could adversely affect the dollar and assets that are dollar based could affect a larger region in the end. Factors like downturn in housing, unstable market equity and problems of work (Baumol & Blinder, 2008, p. 67). When the federal government includes additional cuts for the Federal Reserve, then the return on investment is further eroded (Taussig, 2009. P.12). Lower interests could translate into additional inflammatory consequences, decreasing the value of the dollar. The persistent budget and trade deficit have over the past continued to weaken the dollar (Torgerson & Spencer, 1996, p. 36).
Manufactures are encouraged to set up factories in the US as a result of the weak dollar and as a consequence, jobs are made available to the people together with other benefits (Baumol & Blinder, 2008, p. 67). The US being a major player on the international trade has a very big impact on international trade. When its money unit value is affected then other currencies get affected as well. This is because it will have an effect on company profits. The cost of manufacturing and budget preparation is also affected in relation to other world currencies. The dollar has often caused ramification on capital investment, firm opening, and closing, for instance customer care outsourcing in other nations has been brought to the US.
The international trade on the other hand is detrimental to the domestic economy as a consequence it affects the dollar and this consequently affect the ability of consumers to afford consumer goods (Torgerson & Spencer, 1996, p. 36). I may be unable to afford to purchase a home as a result of these mechanisms. When I try to factor these effects on the dream of owning a home, I feel that assets such as these can get out of reach basically because of domestic and international.
The strength of the economy may also impact on marginal benefits as well as the cost. This is likely to have an effect on my decision to buy a house or not to (Torgerson & Spencer, 1996, p. 36). As identified above, the straight of our economy greatly rely on the domestic and international markets since nations are constantly trading with each other. This means that whatever is happening in one nation will definitely impact the other as long as they are in some kind of relationship.
Other factors that will affect my decision include the amount of money I have. Generally people make decision depending on the money saved. The economy’s strength is also likely to affect my decision considering that when interest rates are high, it’s costly to take a mortgage or buy loans (Torgerson & Spencer, 1996, p. 36). Basically the principle staining that prices increase when administration prints more cash for circulation. Definitely the state will attempt to print more money to counter recession. The impact is in fact hard for many people. Another fact that would affect my decision will be society tradeoffs when there is inflation and consequently joblessness. It would be better for me to make the purchase in times when there is inflation and joblessness (Mankiw, 2008b, p. 117). Unemployment has been increasing; this means that few people have money to commit into the purchase of houses. It’s likely that due to describing demand, houses will be cheaper.
Conclusion
The decision to purchase a house is not a very simple one and entails a lot of researching and assessment of the environment. This is because anyone who is about to buy a house has to put into consideration all the merits and the demerits before making the decision. It’s important to reflect on the obvious and implicit costs of the decision.
Reference List
- Baumol, W.J & Blinder, A.S. (2008). Economics: Principles and Policy. New York: Cengage Learning
- Mankiw, N.G. (2008a). Essentials of Economics. Melbourne: Cengage Learning
- Mankiw, N.G. (2008b). Principles of Economics, 4th Ed. Melbourne: Cengage Learning
- Taussig, F.W. (2009). Principles of Economics. Onley: Bibliobazaar LLC
- Torgerson, D.J & Spencer, A. (1996). Education and Debate – Marginal Costs and Benefits BMJ 1996; 312:35-36