Economic Choice and Economic Decision Making

Economic Choice and Economic Decision Making

Praveen Viswanathan

ECO/561

Aug 31, 2016

Gerald Weisenseel

Introduction

Before purchasing any vehicle, it is critical to understand all the factors that can impact your decision making process which ultimately helps in buying the best car that meets the needs of the consumer. This will ensure the consumer to get maximum profit for their financial investment. The purpose of this paper is to review various factors such as economy trends, interest rates trends, crude oil vs gasoline prices, household specifics, go green initiative vehicles vs low maintenance cost vehicles and circular flow model before purchasing a vehicle.

Financing and Interest Rates

        According to Tisa (n.d.), “The Fed lowers interest rates in order to stimulate economic growth. Lower financing costs can encourage borrowing and investing. However, when rates are too low they can spur excessive growth and perhaps inflation. On the other hand, when there is too much growth the Fed raises interest rates. Rate increases are used to slow inflation and return growth to more sustainable levels. Rates cannot get too high, because more expensive financing could lead the economy into a period of slow growth or even contraction”.  Annual percentage rate is key and should be taken into consideration for a consumer to purchase a new or old car. In 2015 the interest rate for new cars was less than 1.5% for the people who had excellent credit. Credit plays a huge role in making a decision whether to go for a new or old vehicle. Looking at the interest rates trends for the year 2015, interest rates neither increased nor decreased. Interest rates were much lower and stayed pretty consistent in 2015.

        Lower interest rates drove me looking for reliable family vehicle with great mileage under a budget of 33,000 dollars. Honda Odyssey is one of the leading minivan and known for its comfort, fuel efficiency, power, reliability and cost effectiveness.  

        Trade-off is often referred as opportunity cost and in other words trade-offs are referred as buying product A or sacrificing something instead ended up buying product B. In my case the trade-offs for purchasing a new car is buying an old car or investing money in the mutual funds. Though investing in mutual funds looks promising for long run, we were in need of a second vehicle to support the family especially with growing kids and investing money option was ruled out. Weighing pros and cons of buying new car vs buying old car, reliability of new car forced us to buy the brand new car.

Gasoline Prices

        The trend of Gasoline prices do impact the decision making process of purchasing cars. Gasoline prices vary based on the demand of crude oil. According to Amadeo (2016), “Crude oil prices make up 71% of the price of gasoline. The rest of what you pay at the pump depends on refinery and distribution costs, corporate profits, and Federal taxes”. In 2015 the crude oil price was well below 37 dollars per barrel, which in turn brought down the gas prices below 2 dollars a gallon. One of the motivation factor of buying a minivan for my family is due to decline of gasoline prices from the mid of 2014.