Principle of Economics
In the process of deciding whether to purchase a house or not, there are some principles of economics that relate directly to the decision. Such principles are trade-offs, marginal costs and benefits, the incentives one is offered and the opportunity cost of the decision. According to Mankiw (2011), trade-offs imply that the person to make the decision of a purchase is caught in a situation which forces him or her to choose one product over the other while he or she misses out on the benefits of the latter. The capitalistic concept of the society has led to a thorough competition among producers in businesses. They compete for the attention of the consumers who decide on which product to purchase among the alternatives (Geschwender, 2009). This open market system or the capitalistic principle creates a variety of products, which give the consumers options to choose from in a purchase. The principle of economics and other emerging factors influence the purchasing decisions made by the consumers. The instability of the product prices in the market is caused by the fluctuation of the economy.
Since I want to purchase a house, I will have to consider the trade-off since a great amount of my savings will be consumed by the purchase. I could use the amount of my savings on other activities such as starting a new business or purchasing new computers. Thus, in this situation of a trade-off I will have to weigh my options to determine the most convenient and suitable alter native to adopt. My first step will be to determine the benefits I will enjoy from purchasing the house. One of the benefits associated with the purchase can be its large size, which is appropriate for my large family or its nearness to town or the admirable environment. It could also be well structured with enhanced facilities such as a swimming pool. Hence, for my decision to be inclined towards the purchase when I realize that its benefits are better than other alternatives I could purchase.
The reasons I am offered would also count as the second principle. An incentive would motivate me to purchase the house because it will relieve my income to substantial extent. If in the context I am attracted by a cutback on my income tax, chances are high that I will continue with the purchase to experience the relief on tax. People in the market respond positively to incentives. The third principle related to my purchase is the opportunity cost of my choice. According to Mankiw (2011), the opportunity cost of a commodity is what a person gives up to get that commodity. Each alternative in my mind before the decision to purchase the house will have a value and the decision I make will be at a cost of the value of the other alternatives I will have forfeited. I will not be able to enjoy the value of the next best alternative I will have sidelined in order to purchase the house. Opportunity cost sums up both implicit and explicit costs. In this regard, explicit costs can be identified as the total amount of cash I will have used in the purchase of the house once I make the decision. Implicit costs refer to the intangible costs that will be incurred on me in non-material terms such as interference of my social relationship with others because of shifting from my old house to the new one.
The principle of marginal costs and benefits is also necessary in the process of deciding whether to buy a house or not. Marginal means “added perspective” therefore marginal costs and benefits are significant for making decisions on production and consumption in the market. Mankiw (2011) continues to elaborate that marginal change is a term used by economists to mean a small and increased change on an existing plan. They are determined by marginal measurements of the alternatives or options up for the purchase. My decision to purchase the new house will be based primarily on the ratio of the marginal benefits to marginal costs.
If the marginal benefits of purchasing the house are more than the marginal costs, I will be in a position to initiate the transaction. The marginal benefit in this case might be a favorable parking system located on a strategic side or providence of a guard who will offer security or a shopping center with all business entities that will be of help while I reside in the neighborhood. Measuring marginal costs and benefits is important to every consumer and producer so that they can determine the best option. My income and savings will determine the marginal costs because if the total amount of buying the house is high, my income and savings will be quite less. Therefore, the marginal costs will be shown by the other necessary commodities that I will not purchase because of the reduced income and savings. If I will be in a predicament of low income, I will not be able to afford the house hence; I will decide to forfeit the purchase.
Effect of the Strength of the Economy on Marginal Benefits and Cost
The state of the economy has an impact on marginal benefits and costs in that the Gross Domestic Product (GDP) dictates the degree of income an average person gets. A flourishing economy can be depicted by steady rates of job employment because of a variety of jobs. The growth of a country’s GDP ensures that the workers have job security and they enjoy note-worthy wages. Therefore, the purchasing power of the consumers who are the workers increases and they are not limited in making purchasing decisions. For example, I will be able to purchase the new house because the marginal costs will not be extended. I will be able to make substantial savings that will only decrease at a reasonable degree after my purchase. Consequently, I will be in a position of purchasing other materials necessary for living in the house or compensate for marginal costs such as electricity and telephone bills once I settle in the house. Geschwender (p.8, 2009) states “the economic condition of the country play a great part in the real estate cycle.”
On the other hand, when a country suffers an economic crunch, its Gross Domestic Product will depreciate and this will take its toll on the workers or consumers. Many employees will be laid off from their respective companies since this will serve as the company’s strategy to meet its costs. Lack of employment reduces the wages to nil and the purchasing power of the consumers decreases. Without a job, I will be unable to purchase the new house because my salary will not be enough to settle the transactions therefore, I will opt for other priorities. If the country’s economy is weak, consumers suffer increased marginal costs. Furthermore, banks and other financial institutions will give out loans of the purchase according to the economic status since the rate of interest charged will rely on this. “The overall health of the economy influences how much consumers spend and what they buy” (Boone & Kurtz, 2011).
Roles of Domestic Economy and International Trade
The state of the economy highly depends on domestic economy and international trade. Economic activities of the country such as trade investments, consumption and government expenditure are constituents of the domestic economy and the performance of each or all influence the economic condition of the country. If the government’s budget is higher on expenditure, the country’s GDP will rise substantially but if the expenditure is lowly scaled, the reverse is true. The lowly scaled expenditure causes a fall in GDP and in turn, jobs become scarce and consumer wages are cut back. The purchasing power of the consumers is then affected negatively (Lindsey & Chrystal, 2007). Economic slowdowns or recessions reduce the demand for products in the market because the consumers switch to affordable ones. Therefore, marketers are obliged to enforce promotions to increase the demands again. Companies begin to limit their costs because of the lower prices and this entails retrenchment of employees.
International trade is fundamental in maintaining the balance of trade of the country’s economy. An increase in balance of trade boosts the country’s GDP increasing job opportunities and wages for consumers. This increases their purchasing power and gives them an easy time in making purchase decisions. A fall in the balance of trade causes a fall in GDP resulting to low wages and fewer jobs. International trade determines the domestic economy. “Export and import price indices are essential for assessing the impact of international trade on the domestic economy” (Rajagopal, p.75, 2007). Construction of houses requires building materials, which are imported, and in the case of the low balance of trade, importation of the materials will decline leading to a low supply of houses. When the supply of houses is low and the demand is high, the prices tend to in crease exorbitantly. When the houses become too expensive and income of the consumer is minimal, his or her purchasing power is sabotaged.
Conditions Leading to Different Decisions
Other different conditions can also lead to different purchase decisions. Such conditions include natural disasters, health issues, failed investments or impromptu retrenchment. Natural disasters such as floods or landslides can be forecasted to be in the region or area of the new house to be purchased. Therefore, I will not choose to purchase it because of the insecurity ahead. It will be difficult to take the risk of losing my property because of the forecasted floods or landslide. If I take the risk and I am caught up in the disaster, I will have to start thinking about a decision to purchase another house and my savings and income will be depleted. The higher price of the house at the time when my income is limited will lead me to attend to the high- priority uses (Baumol & Blinder, 2011).
Health issues such as severe illness of a relative or friend can deter a person from purchasing the new house because most of the income or savings will be directed towards medical bills for the patient’s recovery. Once this happens, the person will not have enough money for the transaction and he or she will therefore decide to purchase other things within the feasible budget. In the case of failed investments, one will not purchase the house because the disposable income will be highly reduced because of the drop in stock in the market. An impromptu retrenchment will put the consumer in a predicament of very low wages and uncertainty of the future. Buying the new house will not be a priority at this point because the limited wages will for basic sustenance of the individual and family. Therefore, the aforementioned conditions will only decrease the wages and savings of the consumer and alter his or her decision of purchase. The decision will be to abort the idea of the purchase because of low purchasing power.
Conclusion
Concisely, my decision to purchase the new house will be influenced with various aspects and conditions. To have the ability of making an excellent decision, I will have to consider my job stability and the wages I get from the particular job. The state’s economic performance will also be an indicator of the validity of my decision considering the fact that its economic stability secures the job market and maintains my wages. The state has a major role to play in determining the purchasing power of consumers because in times of an economic crunch, the level of employment moves down the radar and this means that many people will not have enough money to purchase goods and services.
All these factors determine the disposable income I have, which in turn determines my purchasing power. The principles of economics are also major factors that will influence my decision because weighing the pros and cons of costs and benefits will give me an added advantage of making the best choice. Factors affecting the purchasing power of consumers are not standard because they change with time and the state of the economy fluctuates in different seasons. Thus, different factors will influence the purchasing power of consumers differently. Consumers will prioritize purchases according to their level of income.
References
Baumol, J. W., & Blinder, S. A. (2011). Economics Principle & Policy. Cengage Learning
Boone, E. L., & Kurtz, L. D. (2011). Contemporary Marketing. Cengage Learning.
Geschwender, A. (2009). Real Estate Principles and Practices. Cengage Learning.
Lipsey, G. R., & Chrystal, A. K. (2007). Economics. Oxford University Press.
Mankiw, N. G. (2011). Principles of economics. Cengage Learning.
.Rajagopal. (2007). Dynamics of International Trade and Economy: An Inquiry Into Emerging Markets. Nova Publishers.
Last Completed Projects
| topic title | academic level | Writer | delivered |
|---|