ECON333 CHAPTER 1: An Introduction to the basic concepts
Jan 01, 2016
The Key Actors of the construction Industry
1. Suppliers of basic materials
2. Machinery producers
3. Manufacturer of building components
4. Site operatives who bring together components and materials
5. Project managers and surveyors
6. Developers and architects and engineerers
7. Facility managers and economists
8. Providers of goods and services\delivery, transportation, demolition, disposal etc.
Introducing construction economics
• What is economics?
– Economics is the science of choice - the science that explains the choices that we make.
1. CHOICE, TRADEOFF, AND OPPORTUNITY COST
– Choice is a tradeoff - we give up something to get
something else and the highest valued alternative
we give up is the opportunity cost of the activity
that we choose.
RESOURCES AND WANTS
Two facts dominate our lives.
We have limited resources.
We have unlimited wants
These two facts defines scarcity, a condition in which the resources available are insufficient to satisfy our wants.
THE ECONOMIC PROBLEM
Limited ResourcesThe resources that can be used to produce goods and services are grouped into four categories:
• Labour
• Land
• Capital
• Entrepreneurship
• Labour is the time and effort that we devote to producing goods and services.
• Land is the gifts of nature that we use to produce goods and services. (Air, water, land , minerals etc.)
• Capital is the goods that we have produced and that we can now used to produce other goods and services. It includes interstate highways, buildings, dams and power projects, airports and jets, car production lines, etc. Capital also includes human capital, which is the knowledge and skill that people obtain from education and on the job training.
• Entrepreneurship is the resources that organizes labour, land and capital. Entrepreneurs make business decisions, bear the risks that arise from these decisions, and come up with new ideas about what, how, when and where to produce.
The quantities of goods and services that can be produced are limited by our available resources and by technology. That limit is described by the production possibility frontier.
RESOURCES, PRODUCTION POSSIBILITIES AND OPPORTUNITY
COST
• The production possibility frontier (PPF) is the boundary between those combinations of goods and services that can be produced and those that can not.
• To illustrate the production possibility frontier in a graph we focus our attention on two goods at a time. In focusing our attention on two goods, we assume that all other goods and services produced are constant – ceteris paribus. For example, let take two goods: soda and tape .
Production Possibility Frontier:
Figure 1.1: Production Possibility Frontier –The trade between military goods and civilian
goods
0
5
10
15
0 1 2 3 4 5
Units of civilian goods per year)
Un
its
of
mili
tary
go
od
s p
er y
ear
ab
c
d
e
f
z
Attainable
PPF
Unattainable
• Production Efficiency
We achieve production efficiency if we cannot produce more of one good without producing less of some other good. When production is efficient, we are at a point on the PPF. If we are at a point inside the PPF such as z, production is inefficient because we have some unused resources or we have some misallocated resources or both.
• TradeoffOn the production possibility frontier, every choice involves a tradeoff - we must give up something to get something else. For example we must give up some civilian goods to get more military goods, or we must give up some military goods to get more civilian goods.
• Opportunity Cost
The opportunity cost of an action is the highest valued
alternative forgone. For example, the opportunity cost of
producing an additional civilian goods is the number of
military goods we must forgo. Similarly, the opportunity cost
of producing an additional military goods is the quantity of
civilian goods we must forgo. In the Figure 1.1, if we
choose point d over point c, the additional 1 unit of civilian
goods cost 3 units of military goods. One unit of civilian
good costs 3 units of military goods.
• Opportunity cost is a Ratio:
It is the decrease in the quantity produced of one
good divided by the increase in the quantity
produced of another good as we move along the
production possibility frontier. When we move
along the PPF from c to d the opportunity cost of
one unit of civilian good is 3 units of military
goods. By moving from d to c the opportunity
cost becomes 1/3. The inverse of 3 is 1/3 .
• Factors influencing productivity?
1. The quantity and quality of natural and man made resources
2. The quality and extend of education and training of labour force
3. The levels of expectation, motivation and wellbeing
4. The commitment to research and development
– New technologies and new capital have an opportunity cost. To use resources in research and development and to produce new capital, we must decrease our production of consumption of goods and services.
– The amount by which our production possibilities expand depends on the resources we devote to technological change and capital accumulation.
– Look at Figure 1.2 Increasing output and the PPF curve (Shift in PPF curve indicates growth or expansion of output)
• Economic growth is not free. To make it happen we need to spend more on new machines, i.e. producing capital goods
• SUSTAINABLE CONSTRUCTION
• Efficient use of resources
• Effective protection of the environment
• Economic growth
• Social progress that meets the needs of everyone
Market system
• Market is a place where buyers and sellers come together to do trade.
• Types of markets:
1. Goods and services market
2. Resource market
3. Financial market
Parties traditionally supplying a construction project
• Architects and designers
• Project manager
• Cost consultant
• Main contractor
• Subcontractor
• suppliers
An Economic Model
• Draw a circular flow model? A two sector economy
• Page 15, Figure 1.4
• Figure will be drawn and explained during the lecture hour in the classroom.
MICROECONOMICS AND
MACROECONOMICS
Economist approach their work either from micro or macro perspective: These are called microeconomics and Macroeconomics.
• Microeconomics: is the study of the decisions of individual people and businesses and the interaction of those decisions in markets.
• Macroeconomics: is the study of the national economy and the global economy. It seeks to explain average prices and total employment, income and production.
Table 1.3 The construction Industry, page 19
Define the concepts:
Infrastructure
Housing
Public non-residential
Private industrial
Private commercial
Repair and maintenance