¶ … difficult economic timers, buying a house is a risky decision. Purchasing a home, particularly for the first time, has always been so, but uncertain financial periods -- the downturn followed by a possible upturn -- make it all the harder. Few prospective buyers are aware of the excruciating decisions that devolve around the purchase, nor are they aware of the economic minutiae involved. Investing background economic principles may make this somewhat easier and this is what this essay intends to do.
According to Nicolas Gregory Mankiw (2006), an American macroeconomist, ten fiscal decisions underlie economy as the base for decision-making. Following these principles can increase profitability, whilst reducing the risk of fiscal loss. The six pertinent principles include the following:
People face trade offs. 2. The cost of something is what you give up to get it, 3. Rational people think at the margin, 4. People respond to incentives. 5. Markets Are Usually a Good Way to Organize Economic Activity (the economy usually does well without government interference) and, 6. Governments Can Sometimes Improve Market Outcomes (sometimes it is necessary for the government to help the economy)
1. People face trade offs.
The principle of trade-off is the consideration that every economic decision features the necessity of sacrificing something in order to gain something else. Buying a home involves evaluating whether the decision to sacrifice is worth it, namely whether buying the home is more important to the person than the sacrifice involved.
Elements of trade-off involve location (sometimes people my be constrained to buy a home in some other location than their preferred one due to the reduction in cost); privacy (those who choose to live in urban areas renounce privacy for doing so); the type of residence that one buys (houses, apartments, or townhouses each affect lifestyle, home's resale value, and monthly finances); and price (renunciations will depend on how much one can afford) (Fontinelle, 2010)
2. The cost of something is what you give up to get it (i.e. opportunity cost)
Opportunity costs will have to be sacrificed in order to purchase this home. The buyer might, for instance, have to frequent Salvation Army for a good long time to come instead of frequenting Macys. he/she might, also, have to cut down on food costs and, in short, scale down her budget to tight limits. The person will always have to choose, and choosing will, inevitably, entail denial of one or more items for the sake of something else. The person who elects to buy the house and, by doing so drastically cuts down on entertainment, food, and clothes, has the opportunity cost of the home vs. The other items that may be strongly enticing to the individual. Here, he or she is cutting down on implicit costs (i.e. items that she may be attracted to) for the sake of covering the mortgage of the home.
It is crucial that the individual take into account all opportunity costs before implementing his decision to buy since assessing opportunity costs is fundamental to assessing the true cost of his or her intended action. Ignoring the opportunity costs may drive the prospective homeowner into steep debt. Thorough assessment of all costs and discipline to follow through is required as part of the decision to acquire the home.
3. Rational people think at the margin
Microeconomics assumes that people act rationally and weigh off price vs. cost often trying to gain optimal benefit from their decision. People often find it more rational to consider marginal rather than the average costs of their decision.
Decisions rarely occur at the seams -- and here Manktow (2006) gives the example of choosing to eat voraciously, or fasting. Rather when one is dieting, one is more apt to tread a mean line adopting 'marginal changes', namely small incremental changes (or sacrifices) in order to obtain one's objective. To that end, rational people often compare marginal benefits to marginal costs.
As relevant to the home, marginal costs refer to the price of the rent paid over a long period of time (a recurring charge) for renting a home or apartment vis-a-vis the one-time cost of buying the home. The marginal costs will be the small, but incremental changes, that the prospective homeowner will decide to make to his or her life in order to afford that cost. Marginal changes in entertainment, clothes, traveling expenses and other daily costs will have to be implemented in order to achieve that house, but the owner may consider it well worthwhile.
The economy's strength can play a key role in determining the aspect of marginal costs. Marginal benefits such as trading, exporting and importing, unemployment, house market and inflation will stay static regardless of the...
Clearly, restaurants and bars have their work cut out for them if they wish to capture their share of the scarce entertainment dollars in the market right now. When the main criteria for where to go becomes "whatever is nearby and cheap," that is bad news for those in the industry. Making it even more difficult for restaurant and bar owners, people are traveling less as well for the entertainment.
conflict of interest is at the core of nearly every ethical dilemma. A conflict of interest, simply put, is a situation in which the decision maker has two or more competing interests. Market timing, late trading, insider trading, illegal trading, fraud, partial disclosure, non-disclosure...the manifestation of conflicts of interest is seemingly endless. The business landscape today is a minefield of ethical disasters, some of which have already occurred, some
A secondary mortgage market permits mortgage originators to be more responsive to dynamic mortgage demand and to lower mortgage rates for some homeowners when mortgage demand is higher. According to Koppell (2001): Government-sponsored enterprises (GSEs) are hybrids -- part public, part private -- that affect the lives of most Americans. Anyone who has borrowed money to purchase a home, farm, or pay for college, or invested in a mutual fund
NAFTA Historical Beginning of NAFTA (with specific bibliography) NAFTA Objectives What is NAFTA The Promise of NAFTA NAFTA Provisions Structure of NAFTA Years of NAFTA (NAFTA not enough, other plus and minuses).. Environmental Issues Comparative Statements (Debate) NAFTA - Broken Promises NAFTA - Fact Sheet Based Assessment NAFTA & Food Regulation NAFTA - The Road Ahead NAFTA in Numbers Goal Fulfillment Major Milestones Consolidated Bibliography This study set out to examine the inner workings of the North American Free Trade Agreement. The aim of this study is
Geography It's not my Fault Canada is, by any measure, an immigrant country. Yet it recent years two trends have combined to cause stress on the fabric of Canadian society. A fault line has opened up between new Canadians who have recently arrived and those who have longer roots in the country. This fault causes social frictions, as the mores and ethics of Canadian society are influenced by the newcomers, and by
There is no formula to fall back on when trying to address the real needs and perceived needs of various elements in the organizational hierarchy: hence the challenge for the administrator. The administrative budget is often the aspect of the online learning environment most tempting to "skimp" upon, given that administrative savings are supposed to be one of the benefits of the online environment, "Good management means extensive planning and
Our semester plans gives you unlimited, unrestricted access to our entire library of resources —writing tools, guides, example essays, tutorials, class notes, and more.
Get Started Now