For prospective homeowners, the decision to purchase a home will be one of the biggest decisions to make in his or her lifetime. Purchasing a home can have severe financial repercussions, so the decision must be weighed carefully. In order to make a sound decision, a prospective homeowner must have full knowledge of the steps involved in making the large purchase and the potential future outcomes. The economy is the key reason to making a final decision with a home purchase. Homeowners should realize that a number of the 10 principles of economics will apply to the decision-making process.
For instance, tenants are currently renting a studio apartment and just discovered they are having a baby. The present apartment is small and far away from schools and local services causing an inconvenience. The decision of the tenants is to purchase a new home. The tenants realize the decision to purchase a home requires a substantial financial outlay and making the wrong decision may have long-term financial consequences. The first principle that directly relates to the home purchasing decision will be people facing trade-offs. The first principle, people face trade-offs is based on giving up something that is wanted, to get something else that is wanted. [CITATION PG. 4] The tenants are facing trade-off because of the decision to limit the purchase of unnecessary items in order to save money for the purchase of a home to provide room and stability for the new baby. Studio apartments are easier to maintenance and a renter has no worries about fixing any issues that arise such as plumbing, broken windows, or leaks. When a person purchases a home, there are many factors they need to consider as far as interior and exterior care of the home.
Additionally, the second principle, the cost of something is what you give up to get it plays a role in the tenant’s decision to purchase a home. Renting a studio apartment is less expensive than making a large and weighty home purchase. Even though the cost of living in the studio apartment would be less expensive than purchasing a home, the marginal benefit is still much greater than the opportunity cost. The opportunity cost of the studio apartment is what will be given up when making the new home purchase. Another cost may be the tenant’s familiarity with the area in which they reside. The tenant’s may even be moving away from close family and friends. The cost of something is what you give up to get it does not only apply to money and material items. The third principle, rational people think at a margin applies to the tenant’s new home purchase as well. Rational people often make decisions by comparing marginal benefits and marginal costs.[direct quote pg 6] Marginal costs and benefits are used by consumers to determine if they will make a decision. The tenant’s will make the purchase if the marginal benefit is above the marginal cost. It is more valuable to purchase a home during periods of economic growth rather during a recession. If a consumer purchases a home during a recession, the marginal costs outweigh the benefits. If a consumer purchases a home during economic growth, the marginal benefits outweigh the costs. In the tenant’s scenario, the marginal benefit is greater than the marginal costs of purchasing a home. Purchasing a home within closer proximity of schools and local services will benefit the new family especially with saving money on gas prices by driving shorter distances. The money the family would spend on gas can be used for items needed in the new home. A new home will also provide the additional space needed to raise a family which provides a greater marginal benefit.
Explain how the strength of the economy as a whole affected the marginal benefits and the marginal costs associated with that decision. The strength of the economy determines the market price and is the most important factor in determining interest rates. The interest rates will determine...
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