Economic Decision to Purchase a New House
      We use Economics Theory knowingly or unknowingly in our day to day decision making. Our action is guided by the knowledge we possess. If we buy something, we take decision based on relevant economics theories either consciously or unconsciously.

      When we take decision whether to buy a new house or not, first thing which comes to our mind is price. Because of heavy investment involved, deciding to purchase a new house is very important decision for anyone. Demand of house   is price elastic. It follows law of demand. If price of the house is lower, there will be more demand for houses and vice-versa. Also, since demand of house is price elastic, it is influenced by the consumer income. If consumer income is high, price of houses will be high and if consumer’s income is low, price of houses will be lower.

      First thing which we analyze while buying a house is the benefits from it. As buying a house requires to spend huge money, buyer has to think from where he will arrange the money. Even if money can be arranged, what is the cost of the funding. Can this money be used somewhere else and earn more benefit? This alternate investment may give direct benefit (for example if invested in stock) or long term indirect benefit (for example if invested in children’s education). What benefits buyer can expect are – saving of rent, if house is purchased closer to place where buyer works then saving in terms of transportation cost and price appreciation of the house. There are some intangible benefits also, like feelings of owning a house, having freedom to decorate house and make it environment friendly etc. Buyer needs to analyze the alternatives where buyer can put money and see if it is more beneficial to buy a house. In Economics, this is called “Opportunity Cost”.   Opportunity cost is whatever must be given up to obtain some item. (Mankiw, 2004)   If buyer is buying a house, he is foregoing the opportunity to...