Week 9 – Final Project
XECO212 – Principles of Economics
25 April 2010
A New House - Decision
Many of the decisions we make as consumers are directly related to the current state of the economy. Moreover, as consumers are faced with life changing purchases, they will weigh the marginal costs and benefits associated with their purchase. This is most apparent when there is a decision to purchase a new home. Throughout this paper I will explore the economic principles that directly relate to this type of purchase. As well, identify the contributing factors that help shape the strength of our economy.
The decision to purchase a new home can be a daunting and challenging choice. As current homeowners will testify, various factors will contribute to this life-changing decision. One of these factors includes trade-offs, which they will face before and after their purchase. This trade-off is one of the fundamental principles of economics; stating that we must give up something to receive something else. For a perspective homeowner this trade-off can be a reduction in the amount of available purchasing power. Once the purchase has been completed, the homeowner would be required to spend any extra money on their mortgage payment. Or for a couple who travels, it could be the loss of multiple vacations to popular destinations around the world. Moreover, this first principle defines that every decision comes at a cost. By deciding to purchase a home, one may have to forego other decisions such as buying a new vehicle.
Looking at the second economic principle, which states the cost of something is what you give up to receive something else, can be easily identified with the purchase of a house. According to the chapter text, this is defined as the opportunity costs, making a decision which requires the comparison of the costs and the benefits of a substitute action. The decision to purchase a house is something that weighs heavily on the hearts and minds of the perspective homeowners. Many people who have purchased homes have given up various things for their purchase. As stated earlier, this could be reduced travel, a vehicle, or something else of value. It could also be more implicit costs, including; finding new neighbors, proximity to community resources, or moving near family members. Regardless, people have to make these types of decisions. When my wife and I, decided to purchase our current home, we were forced to go through this process also. These decisions are our way of life.
As the third principle of economics states, rational people think at the margin. According to the chapter text, marginal changes are small incremental adjustments to a plan of action. Measuring the marginal costs and the marginal benefits during the purchase of a home can be a cause for debate between many buyers. During my most recent purchase of a home, my wife was concerned about the proximity of elementary schools to our new house. To purchase this home, my family was deciding that our children would now be required to ride the bus as opposed personally driving them to school each day. The benefits of our long-term goal of raising our children in a well established neighborhood far outweighed our desire to drive our children to school every day. In this case, the marginal benefits outweighed the marginal costs.
The final decision, which help our family purchase a new home were the incentives offered by our lending institution and the federal government. Just like the fourth principle of economic states, people respond to incentives. The purchase of our home was in the middle of the recession right after the President Barrack Obama passed the American Recovery and Investment Act of 2009. We responded to the incentives offered under this bill of providing tax credits to homeowners. On top of this incentive and due to the...