How People Make Economic Decisions Several months ago my husband and I went through the process of purchasing a new vehicle. According to Mankiw (2007), there are several basic economic principles individuals undergo when making a decision: people are rational, people respond to incentives, and optimal decisions are made at the margin. We certainly experienced dealing with these principles and ultimately we had to make a choice on whether to buy a new vehicle or to keep the one we already bought.
Back in April of this year, a couple of weeks before I gave birth to my son, my husband and I discussed whether to trade in my four-door sedan for a sport utility vehicle (SUV). The sedan was a nice luxury car with appealing accessories, such as a panoramic moon-roof, an extravagant sound system with an integrated navigation system, and heated/cooling system. I grew accustomed to the smooth ride also. My vehicle was also very easy to maneuver around especially when I had to parallel park. The problem was, we already had a toddler who was in a car seat and we were about to have an infant who would also require a car seat.
When we placed the new car seat in the car there was very little if any room for another person to sit in comfortably. The two car seats were very bulky and we realized we had to do something and soon. We both already understood the cost adding another baby to the family so we wanted to be sure that we were careful in our selection of the right vehicle for our family. We decided to seek information on the Internet about various SUV’s. We wanted to know information from seating capacity to the rollover rate.
At times we became overwhelmed because there were so many types of SUV’s and we did not want to make a hasty decision due to our fear that the baby might arrive early. We finally focused on the Chevrolet Tahoe because it had everything we wanted at the best value. The marginal benefits we knew we would be happy with this particular vehicle were: the additional seating of up to seven people, a DVD entertainment system that would be very useful for or two-year old when we took road trips, and more storage capacity for luggage and large equipment.
Additionally, the fuel system offered a dual system that also produced cleaner emissions, which was a plus for the environment. Although we were very excited about the benefits we also had to deal with what the marginal costs would be for our decision. Several marginal costs exited if we chose to purchase an SUV. They were: a higher monthly payment, longer payment terms, and the inability to obtain the full value amount for our trade-in vehicle. After evaluating the financial impact of trading in our vehicle we began second-guessing if it was in our best interest financially to upgrade our vehicle.
When we finally told the dealer that we considering not purchasing a vehicle after giving more thought to how we would be financially affected that is when the salesman anxiously discussed all the incentives that were available. The idea of incentives was definitely an appealing point. We were offered a twenty-five hundred dollar rebate, more on our trade-in, and an extended maintenance warranty at no additional cost. My husband and I decided to proceed with purchasing the Tahoe after being offered the incentives.
As a growing family it is very important to us that we make sound decisions. The incentives helped us feel a lot more comfortable with our decision. Our resources are limited and we are not always able to purchase what we want. Making rational choices and understanding the trade-offs will help keep us on track. Taking advantage of incentives when feasible is also great because our goal is to try to get maximum benefit at minimal cost. References Mankiw, N. (2007). Principles of Economics (4th Edition). Mason, OH: Thomson South- Western.