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Purchase a New House

Purchase a New House

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Published by: hallofplagiairism on Jan 16, 2010
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07/05/2013

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Economic Decision to Purchase a HouseOur behaviors and decisions in our daily lives are affected by economics. Whenmaking decisions, we will use economic theories either consciously or subconscious todecide if we will make or reject that decision. The same can also be used to explain our actions and behaviors when making an economic decision to purchase a house. This paper will evaluate how economics affect one’s decision to purchase a new house.First, the decision to purchase a new house is considered a large and importantdecision by many. This is because the prices of houses are usually very high, and thus purchasing a new house will greatly deplete the savings of an individual. The demand of houses is highly price elastic. Economic theories state that the larger the proportion of incomea certain purchase requires, the more price elastic the demand will be. In the case of the purchase of a new house, it will require the spending of a large proportion of an average person’s income, hence this will greatly lower the purchasing power of the individual whenthe decision is made to purchase the house. Furthermore, buying a new house will require people to shift from a familiar environment to a less familiar environment and this can be alife-changing experience which may be scary to some. Hence, these are all factors whichmake the purchase of a new house a very difficult decision to make.There are various principles of economics that can be applied to a decision to purchase a new house. First, one of the principles will be that of trade-offs which people haveto face. Every decision comes at a cost. In this case, the decision to purchase a new housewill deplete people of a large proportion of their savings. The tradeoffs which they face will be alternatives which they get to enjoy with the same amount of money. For example, thesame amount of money spent on a new house can be used on sending a child to university,going on a long holiday or purchasing a new vehicle. Thus, a person will need to weigh the pros and cons of these alternatives against the decision to purchase the new house. This will
 
involve identifying the benefits of the purchase of the new house. An example of a benefitwill be a newer and cleaner environment which will be beneficial to the health of children. Inaddition, larger space will mean additional storage for the family and a more comfortableliving environment. Thus, consumers will make the decision to purchase a new house whenhe or she feels that it is worth it to give up the alternatives for the benefits which a decisioncan bring.The second economic principle which can be applied to the decision to purchase anew home will be the opportunity cost of the decision. Opportunity cost refers to the value of the next best alternative which one has to give up. This will involve both explicit and implicitcosts. Explicit costs merely refer to the total money which is spent on purchasing the newhouse. However, implicit costs will cover non-monetary costs such as the loss of goodneighbors and the possible bond which one can form with other members of the familyshould the same amount of money be spent on a family vacation instead. Marginal costs and benefits is also another example of a principle of economics which can be applied to thegiven scenario to purchase a new house. A person will only make a decision when themarginal benefits outweigh or are equal to marginal costs. In this case, the marginal benefitsof the decision to purchase a new house may include better vicinity which is closer to schoolsand local services. Lastly, another principle of economics which can be applied to thedecision to purchase a new house will be the incentives which one is offered. For example, purchasing the house may entitle the owner to a reduction in income taxes (Principles of Economics).As discussed above, one will need to measure the marginal benefits and costsinvolved before making the decision to purchase a new house. Some examples of benefitswill include a cleaner environment, larger space and a more convenient location where thehouse is nearer to local services and schools. Facilities in the neighborhood such as gyms,
 
sports complex and shopping malls can also be considered benefits of purchasing a newhouse. On the other hand, costs of purchasing the new house will be the amount of moneywhich one has to give up to purchase the house. This will reduce the amount of savings onehas and thus the person will be less able to purchase other goods such as groceries and petrol.Thus, the marginal costs and benefits of the decision will depend on factors such as theincome of a person. When a person is poor, the decision to purchase a new house will affecthim or her more drastically than then a person is rich (MARGINAL ANALYSIS).One of the factors which can affect marginal marginal benefits and the marginal costsassociated with the decision to purchase a new house will be the state of the economy. Whenthe economy is in good health, consumers will be more likely to enjoy higher wages andstable jobs due to the growth of gross domestic product and the economy. As such,consumers with their higher income will have more purchasing power. This makes them lessaffected by the purchase of a new house for they have more money and will be less worriedabout the decline in purchasing power. However, when there economic is in poor health suchas during economic slowdowns or recessions, GDP will fall and this will affect consumersnegatively. For example, firms which find it hard to sustain operation due to a decline indemand will be forced to retrench staff so as to lower costs of operation. When this happens,unemployment rates will increase and people will experience a decrease in amount of wage.As a result, people will have lower disposable income and be less willing and able to purchase a new house. In addition, marginal costs will outweigh marginal benefits in this casefor people may be unable to afford necessities such as petrol and food should they spend sucha large proportion of their income and savings on the new house.Domestic economy and international trade play important roles in affecting thestrength of the economy. First, our domestic economy is made up of components such asgovernment spending, trade, level of consumption and level of investments. Changes in these

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