Any decision to purchase a product requires the buyer to take into consideration several factors including marginal costs, marginal benefits, interest rates and the general economy among others. According to Mankiw, people make decisions all the time and these decisions are dependent on the general economy which is dependent on the interaction of people within it. (2006, pp. 4) Individual decision making is dependent on several principles, with the following having directly influenced my decision to purchase a new home as opposed to continuing to rent an apartment:
The Principle of Tradeoffs
In the process of decision making people are always faced with various choices, picking one of the choices means foregoing the other choices. This is referred to as a tradeoff where one foregoes one goal for another. The trade off in this case is between purchasing my own house and continuing to live in a rented apartment. Tradeoffs faced in individual decisions are often different from those faced by people making decisions which will affect the whole society.
The Principle of Cost
This refers to what one gives up in order to achieve something else. Due to the availability of different tradeoffs or alternatives, one has to consider the costs and benefits of choosing one alternative above the others. The most favorable choice is one whose benefits are greater than the costs. The person faced with the decision should therefore have sufficient information concerning all available alternatives. The decision whether to buy my own house or to continue living in a rented apartment is dependent on a comparison between the marginal costs and marginal benefits of the two situations. The cost of purchasing my own home is definitely large, but the benefits I will accrue outweigh this cost. This does not however mean that such costs and benefits are clear cut especially in cases where such benefits and costs are not easily quantifiable. (Mankiw, 2008, pp. 5)
The Principle of Marginal Thinking
Decision makers are in most cases considered to be rational thinkers, meaning that they react to situations in a logical manner and give reasonable explanations for their final decisions. At times this involves marginal thinking, that is one tries to figure out what extra benefits can be achieved by choosing one alternative over another and also what extra costs will be incurred to this effect. This brings about the concept of marginal benefits and marginal costs. Any rational individual always chooses the option that presents greater marginal benefits compared to the marginal costs. In making the decision to purchase my own house I had to make a comparison between the marginal costs and marginal benefits and came to the conclusion that the marginal benefits were greater and therefore it is better for me to move out of the apartment. (Mankiw, 2008, pp. 6)
Response to Incentives
Individuals and groups make their decisions based on a comparison of the costs and benefits they face. Mankiw, (2008, pp. 7) is of the opinion that when such costs and benefits change, peoples’ decisions also tend to change depending on the incentives resulting from these changes. Incentives refer to those factors that influence an individual or a group of people to take a particular course of action. The incentives may be monetary or non monetary and the strength of their influence depends on the importance the decision making party attaches to them. People’s interaction in a market situation is dependent on the costs that are prevailing in the market as put forth by the suppliers and the benefits accrued by the consumer when he/she decides to purchase the commodity that is up for sale. The same situation applies to my decision to purchase a new home. Incentives such as low interest rates and other government incentives played a major role in my decision.
A Comparison between the Marginal Costs and Benefits of Purchasing a Home and Renting Apartment
Marginal costs in this case refer to the extra costs incurred in purchasing a new home as opposed to renting an apartment, while marginal benefits refer to the savings and other extra benefits that are accrued from purchasing the home. The benefits and costs are both monetary and non monetary. (Conkling, 2004, pp. 25-27)
The marginal costs of purchasing a new home include incurring new expenses, forgoing cheaper transport and having to take up gas costs that will be incurred from using my own vehicle to and from work. The new expenses arise from the fact that in the new home I will have to pay for the repairs of broken down items whereas in the alternative situation these costs are paid for by the landlord of the apartments where I currently rent a studio. While living in the apartment, I use the bus to and from work which is cheaper compared to the cost of gas that I would use to fuel my vehicle.
The marginal benefits that will be accrued from moving into my own house are mostly non monetary. The new home will be more spacious meaning that my family and more so the children will be in a position to grow up in a stable environment compared to that of the apartment. In as much as the cost of buying a new home is huge, the cost of renting an apartment is even higher. This means that buying a new home will be more beneficial as it is a one time pay off compared to that which is incurred in a rental agreement which involves continuous payments over specified time periods.
By purchasing my own home, I will also be able to enjoy the incentives offered by the government to first time home buyers. For example in New York, tax credits are being offered to first time purchasers in a bid to encourage people to buy their own homes. This means that the new home buyers will save large sums of money yearly from the twenty percent tax credit claims that they will be allowed to make on their mortgage interest costs. This was made possible through a legislative enactment by the federal government as part of the United States recovery and reinvestment program. (Governor Paterson, 2009, para. 1-2). Besides the tax credits, the federal government also offers funds and grants to first time home owners through the Department of Housing and Urban Development.
It is important to note that the decision to purchase also depends on the general assessment of the economy. Due to the effects of the global economic crisis the economy has lost some of its ground meaning that it is not as strong as it was before the crisis. The prices of commodities such as gas have gone up and renting apartments has also become expensive. On the other hand the cost of purchasing a home has gone down since most property in the real estate sector has lost its value. This translates into cheaper houses meaning it is more beneficial to buy a home at present than rent one.
The domestic economy is showing signs of recovery and so are the economies of other countries. International trade will also experience growth with time but at present the fact that most economies of the world are yet to make a full recovery also has its effects on the strength of the United States economy. The introduction of stimulus packages by the government and establishment of policies that will lead to an eventual steady growth of the economy are slowly showing positive progress meaning that in time different sectors of the economy such as the real estate and financial sectors will pick and things will more or less return to normal. The effects of the economy have led to changes in the costs and benefits of purchasing different commodities including homes meaning that the incentives have also been affected. Just as the principle of availability of incentives stipulates, decisions have been swayed by these changes in marginal costs and benefits.
A different decision could have been arrived at if the factors that led to the decision to purchase a new home were different. For example if the costs of the decision to buy outweighed the benefits, I would have chosen to continue renting the apartment in the short term until a time when the terms of purchase were favorable.
Decisions whether individual or group decisions depend on different factors. These factors may have an effect at the individual or societal level. They are at times dependent on the general economy which is subject to the effect of international economies. Therefore in order to make a viable decision it is important for a person to take the necessary information into consideration, weigh the costs and benefits of different alternatives and choose one which will best suit ones personal needs.
Conkling, R. L. (2004). Marginal Cost in the New Economy: A Proposal for a Uniform Approach to Policy Evaluations. New York: M. E. Sharpe Inc. Publishers. Web.
Mankiw, G. N. (2006). Principles of Economics. 3rd Ed. New York: South Western Cengage Publishers. Web.
Mankiw, G. N. (2009). Principles of Economics. 5th Ed. New York: South Western Cengage Publishers. Web.
Paterson, D. A. (2009). Governor Paterson Announces Federal Income Tax Credit for First Time Home Buyers. New York Real Estate Rama.Web.