The Economics of Decision Making

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Table of Contents

  • The microeconomic of consumer purchase
  • Economic factors
  • Purpose of the product
  • Psychological satisfaction
  • The macroeconomics of consumer purchase
  • The effective Federal Fund Rate and the Consumer Price Index on housing
  • The consumer price index on housing
  • Conclusion

According to Maynes (2016), the choice of decision that prompt consumer purchase is usually influenced by various economic factors. Thus, the desire to purchase different consumer goods, e.g., luxury goods, ordinary goods, normal goods, substitute and complement goods will vary depending on the price elasticity, income level, and consumer market confidence among other factors (Davidson & MacKinnon, 2017). Even so, consumer purchase and consumption patterns may unlikely to vary that much on certain commodities, e.g., food items. Such may be due to the value consumer attach on necessity goods. Nonetheless, in all the different cases of consumer purchase, the decision criteria usually vary among consumers in different neighborhoods, nations, and around the globe (Hausman & Wongswan, 2017). Hence, this assignment will focus on the microeconomics and the macroeconomics components that influence consumer decision process while prompting purchases for various consumer commodities.

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The microeconomic of consumer purchase

One of the big purchases ever done in the past was engaging in mortgage financing for a new home. The decision to borrow money for the new home was triggered by an intensive inquiry into alternative funding sources and the amount of interest offered upon borrowing by the loaning institution (Maynes, 2016). Likewise, the choice of the decision to borrow money for home financing was prompted by how well the relevant credit officers were willing to understand the kind of purchase decision involved when borrowing, and the convenience of issuing and paying the debt. Hence, achieving an understanding of how different factors interdependently prompted the purchase decision was vital in determining the right time to use mortgage for home financing. The decision to opt for mortgage financing was achieved at the time when several credit institutions were advertising for cheaper mortgage terms for new homeowners. Apparently, advertising for cheaper and flexible mortgage terms, with favorable repayment period was an ideal strategy that the preferred lending institution undertook to understand the consumers’ desire to own a home at the time. Therefore, the opportunity was ideal for me to not only buy a house or an apartment but to purchase my dream home (Davidson & MacKinnon, 2017). Factors driving consumer demand for housing

Economic factors

Bestowing from studies by Davidson and MacKinnon (2017), changes in the economic factors immensely influence consumer demand and purchase decision. Therefore, the decision of a consumer to opt for debt purchases is usually determined by the affordability of the product in the market, the amount of their disposable income, availability of mortgage financing, as well as consumer confidence in the housing market, among other demographic, interest, and tax benefit factors (Maynes, 2016). As such, where the consumer real income is not able to achieve the purchase they are likely to resort to borrowing or installment payment depending on the confidence level in the variation in future earning and the economic factors in the market for now and in the near future. The consumers will be willing to secure loan/ mortgage for purposes of home financing as it provides an ideal alternative for new homeowners to access funds quickly, easily, and in a lump sum to be repaid in installments for a specified duration (Hausman & Wongswan, 2017).

Purpose of the product

The purpose of the product is to serve is another reason why the consumer may be willing to acquire it irrespective of the term of financing. The need to own a house is an important decision that anyone seek to achieve in life. Owning a home is a basic necessity that requires highly involving/ complex and extended decision process, with in-depth research. However, making the home purchase will again vary depending on the basic purpose it serves, i.e., offer shelter (Davidson & MacKinnon, 2017).

Psychological satisfaction

The psychological satisfaction one achieves in owning a home is also vital in promoting the purchase. Hence, psychological satisfaction will dictate the style, luxuriousness, accommodation, and modernity of the house desired by the homeowner. The tradeoffs in the decision of owning a home will sometimes range between the need for shelter and luxury (Davidson & MacKinnon, 2017). For instance, some may require bungalow, single-family detached homes, a ranch home, terraced houses for commercial purposes, semidetached homes, or even mansion for prestige. In such cases, psychological satisfaction may be achieved depending on the class, status, profession, and even the neighborhood one wish to be associated (Maynes, 2016). Hence, where homeowners are sometimes unable to finance these properties by themselves they are likely to consider an alternative source of funding to achieve purchases of the homes matching their preferred status and family needs.

The macroeconomics of consumer purchase

Likewise, some of the macroeconomic components that influence consumer purchases for a home may include inflation, interest rate, government regulations on housing, stock market prices in real estate, along with money supply in the economy (Davidson & MacKinnon, 2017). In the US, the federal and the state government are usually responsible for regulating the real estate sector, as well as the entire economic program of the nation. Hence, the government will achieve taxation policy and GDP contribution made by the real estate sector. In the case of the assignment, it is imperative to achieve an example of the GDP and the real PCE for the US during the last decade (Maynes, 2016). The analyses of the GDP and Real PCE for the real estate sector in the USThe graphs below present the real GDP and the real PCE trend in the US over the last decade (2007/2017). The graph reveals the inconsistencies in the real GDP where the worst GDP trend recorded being in 2009.

The observed trend signifies that the country was undergoing economic depression and consumers at the time were cutting back on expenditure, i.e., withholding their spending. It also means that there was little money in circulation in the economy further reducing the real personal expenditure consumption for the general consumers in the US in 2009. Nonetheless, there has been a consistent rise in the GDP after 2009, with the highest recorded in 2015. It means that the economy began doing relatively better and the government continued to encourage spending among the public (Davidson & MacKinnon, 2017). The analysis of the two graphs implies that the turn in economic events influenced the manner in which consumers were willing to spend on basic commodities such as housing and food, along with sending on luxurious commodities in a country. According to the US Bureau of Statistics, the real GDP and the real PCE in the country have increased to 4.2 and 0.5% respectively in 2018.

The effective Federal Fund Rate and the Consumer Price Index on housing

Maynes (2016) define the federal fund rates (FFR) as the interest rate charged by the depository institution in which they are willing to lend reserve balances to other depository institutions overnight without asking for collateral. Essentially, FFR is regulated to match market expectation and the vibrancy in economic activities of a nation. Thus, it is a tool used by economic experts to regulate the amount of inflation and money circulation in an economy (Davidson & MacKinnon, 2017). In the US the FFR is a major determinant in the financial market as it influences other rates, e.g., the prime lending rates charged by banks on loans. Thus, where the federal fund rates are adjusted the lending institutions will adjust the prime rates in a directly proportionate manner, i.e., high FFR rates result in high prime lending rates charged on credit cards and on loans and mortgages issued to customers, and the opposite is true for the case (Hausman & Wongswan, 2017).

The consumer price index on housing

Confirming from studies by Maynes (2016), the CPI is a major determinant of the FFR. Usually, the Federal Open Market Committee (FOMC) is the body entrusted with regulating the FFR in comparative to any inflation in the CPI.

It offers a stronger correlation between FFR and inflation, i.e., CPI. Thus, where the depository institution increases the interest rate it implies that inflation continues to rise in the country, and the opposite is true. Where the FFR is higher it implies of a positive real interest rate for the depository institution. However, in the case of the graph, the FFR is inconsistent and below the zero inflation level depicting a negative real interest rate being offered by depository institutions (Davidson & MacKinnon, 2017). Proving from the case, the global economy similar to that of the US is currently experiencing faster growth further mounting the pressure for inflation. Thus, the Federal Reserve and the FOMC will always be motivated/ inclined to adjust their lending rate to fit in with those of borrowing depository institutions needing large balances for reasons of curbing inflation and achieve economic growth (Hausman & Wongswan, 2017).

The influence of the Federal government/ state government program on the home purchase decisionIn the wake of the year 2018, the government announced some benefits to be incurred by homeowners. Likewise, economists have projected that the achieved tax reforms by the current regimes of government, (Obama and Trump administration) aimed at lowering taxes for property developers, as well as real estate tax reliefs (Maynes, 2016). Hence, homeowners will in future enjoy long-term tax trend rendering the dream of owning a home a much realistic and achievable goal as opposed to other past regimes. While average households in the US spend nearly 1% to 5% of their income on home repairs, the government has capped house cost not to exceed 30% of individual earning. The amount includes homeowner insurance and on property taxes in the US (Hausman & Wongswan, 2017). Whereas small homeowners are not likely to enjoy many benefits from tax incentives, real estate owners and large homeowners are set to benefit immensely from the tax strategy, i.e., tax cap, mortgage interest, achieved by the administrations (Hausman & Wongswan, 2017).


From the analysis, several economic trends bear a large impact on consumer purchase decision. Nonetheless, the ideal decision should be based on an in-depth analysis of the macro and the micro components of the economy. In the case for the assignment, the suitability of mortgage decision is based on the affordability of the product, the amount of their disposable income, availability of mortgage financing, as well as consumer confidence. Likewise, inflation, GDP, CPI, and FFR, along with other demographic, interest, and tax benefit factors tend to influence consumer purchase (Davidson & MacKinnon, 2017; Maynes, 2016).

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