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ECON333 CHAPTER 1:

ECON333 CHAPTER 1:. An Introduct ion to the basic concepts. The Key Actors of the construction Industry Suppliers of basic materials Machinery producers Manufacturer of building components Site operatives who bring together components and materials Project managers and surveyors

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ECON333 CHAPTER 1:

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  1. ECON333CHAPTER 1: An Introduction to the basic concepts

  2. The Key Actors of the construction Industry Suppliers of basic materials Machinery producers Manufacturer of building components Site operatives who bring together components and materials Project managers and surveyors Developers and architects and engineerers Facility managers and economists Providers of goods and services\delivery, transportation, demolition, disposal etc.

  3. 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.

  4. THE ECONOMIC PROBLEM 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.

  5. Limited Resources The resources that can be used to produce goods and services are grouped into four categories: • Labour • Land • Capital • Entrepreneurship

  6. Labouris the time and effort that we devote to producing goods and services. • Landis the gifts of nature that we use to produce goods and services. (Air, water, land , minerals etc.) • Capitalis 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.

  7. RESOURCES, PRODUCTION POSSIBILITIES AND OPPORTUNITY COST 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.

  8. Production Possibility Frontier: • 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 .

  9. Figure 1.1: Production Possibility Frontier –The trade between military goods and civilian goods a 15 b Unattainable c 10 d Attainable Units of military goods per year z e  5 PPF f 0 0 1 2 3 4 5 Units of civilian goods per year)

  10. 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. • Tradeoff On 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.

  11. 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.

  12. 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 .

  13. Factors influencing productivity? • The quantity and quality of natural and man made resources • The quality and extend of education and training of labour force • The levels of expectation, motivation and wellbeing • The commitment to research and development

  14. 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)

  15. 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

  16. Market system • Market is a place where buyers and sellers come together to do trade. • Types of markets: • Goods and services market • Resource market • Financial market

  17. Parties traditionally supplying a construction project • Architects and designers • Project manager • Cost consultant • Main contractor • Subcontractor • suppliers

  18. 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.

  19. MICROECONOMICS AND MACROECONOMICS Economist approach their work either from micro or macro perspective: These are called microeconomics and Macroeconomics.

  20. 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.

  21. Draw Figure 1.5 • A model for construction economics: a new approach

  22. Table 1.3 The construction Industry, page 19 Define the concepts: Infrastructure Housing Public non-residential Private industrial Private commercial Repair and maintenance

  23. ConclusionHomework: • Read Reading 1, page 25-27 • What is construction economics? • By George Ofori

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