ECON333CHAPTER 1:

An Introduction to the basic concepts

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.

Draw Figure 1.5

• A model for construction economics: a new approach

Table 1.3 The construction Industry, page 19

Define the concepts:

Infrastructure

Housing

Public non-residential

Private industrial

Private commercial

Repair and maintenance

ConclusionHomework:• Read Reading 1, page 25-27

• What is construction economics?

• By George Ofori