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Management in the Built Environment Lesson 1 – Real Estate Economics Concepts. AIM OF THIS MODULE. To understand the Micro-economic principles that will later be applied to the real estate environment Identify and evaluate the core issues of economics.
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Management in the Built EnvironmentLesson 1 – Real Estate Economics Concepts
AIM OF THIS MODULE • To understand the Micro-economic principles that will later be applied to the real estate environment • Identify and evaluate the core issues of economics. • To develop knowledge and skills on economic analysis relevant to the construction and property industry. • To apply simple economic concepts and decision making techniques to construction /property scenarios
Introduction to Construction & Property Economics • Lectures – Twice a week , 3 hours each • Attendance at lectures is very important • Attendance is monitored. • Make notes and maintain a file • Exam would be on Sat 31st August 2019 • 3 hours, 4 questions each 25 marks
Good Practice • Attend Lectures – arrive on time • Revise and enhance your notes • Participate in all session formats • Manage your time effectively • Maintain a conducive learning environment • Engage in discussion with your peers • Communicate with the module tutor • Mobile phone put in silent/vibration mode during lectures
LEARNING OUTCOME of this lecture • Appreciate the significance of resource scarcity in the allocation of economic decisions • Distinguish between different type of resources • Understand that opportunity cost measures the cost of not using scare resources to procedure a particular good or service
LEARNING OUTCOME of this lecture • Appreciate that producers need to specialise to efficiently satisfy the wide range of demands in a complex society • Comprehend the roles of producers and consumers within the market • Distinguish between different economic systems and understand the mechanism by which resources are transformed into useful goods and services
What is Construction & Property Economics ? A study of people and how their action affect the construction industry and property values • Study that uses economics principles • Micro and Macro Analysis • Analyzes trends • Consider the supply (Construction) and demand (Property) • Links general economics theory and real estate practice
Setting the Context • What is economics about? • EVERY DAY LIFE!!
What is economics? • Economics originates from the Greek word for household management • Householder • UNLIMITED WANTS
What is economics? Basically, economics is about using/managing scarce resources (and making decisions about their use)
Defining Economics KEY CONCEPTS • Economics is the study of rational choice under conditions of scarcity • Opportunity Cost is the best alternative that you gave up when making a choice
Mirco-Economics examines :- • The choices that firms have to make over what to produce and how much to charge • Householders’ choices about what and how much to buy • It also investigates the operation of the markets in which firm and household buy and sell these goods and services
Central Role of Society • Allocate these resources in accordance to choice of its members • Need to make decisions with regards to • What will be produced • How much will be produced and • Who will get it
Defining Scarcity and Choice • Rational Choice means people making • Calculated, self-interested choice after • Risk • Cost • Benefit
Scarcity and Choice Scarcity – dual existence of instable wants and limited resources for providing the item that satisfy such wants. Force to make choice : How When and To whom To allocate these resources
Economics is the study of : • How individual /nation use resources under their control to satisfy their wants as fully as possible, or to maximise their satisfaction given their resource constrains. • Economics is concerned with scarcity and choices
The choices to be made Scarcity forces society to make a number of decision regarding the allocation of choices. 3 basic problems that requires choices to be made : • What will be produced • How will ii be produced • Who will get what is produced
Choice 1 - What will be produced Need to distinguish between : Consumer Goods : Goods that are produced for present consumption and satisfies wants directly. E.g. food, clothing and toys Capital Goods : Goods that are used to produce other good and services over time. E.g. Building, infrastructure, vehicle and heavy industrial machinery
Interaction between Choice and Investment The process of trading and forgoing present consumption for future and new benefit is call INVESTMENT Every modern society must decide what resources are earmarked for consumer goods and what resources will be invested in order to increase the flow of goods and services for future consumption.
Choice 2 – How will it be produced Decisions on • Techniques • Method • Duration • Material • Labour • Weather/climate • Impact to environment
Choice 3 – Who will get what is produced Decision on • who gets the good or service and • how will the rewards of production be shared among the resource owners In order to make these decision and to use resources as effectively as possible, this implies the need to produce the goods and services which satisfy individual’s want as fully as possible, which in turn implies taking account of individual’s preference.
Preference and Utility • To achieve the greatest level of satisfaction from a given amount of resources requires hierarchy of prioritization of resources based on individual preference. • The ability of a good or resource to satisfy wants is known as its utility. • Different individuals will gain different level of satisfaction from different good/resources.
Diminishing Marginal Utility When individual make decision to spend income, tend to spread over different types of goods and services Definition : As the consumption of the same good increases, the satisfaction an individual get from an addition unit of that goods decreases.
Diminishing Marginal Utility Total Utility – the total amount of satisfaction gained from consuming X glasses of water Marginal Utility – the amount of satisfactory to be derived from drinking an extra glass of water Total utility of drinking any amount of water is equal to the sum of individual marginal utility up to the number of glasses
Marginal Analysis Optimal Allocation of resources : • If total utility increase because of addition of 1 extra unit of resource, then individual should make the change • The individual should continue adding additional resources as long as total utility continues to increase • When further additions of resource fails to increase the total level of utility, then the optimal allocation has been reached
Definition of Marginal Analysis • The technique of considering increment changes in resource allocation and weighing the marginal benefits and marginal cost • Marginal benefit = gain & Marginal Cost = Loss with each incremental unit of resource input Point of OPTIMISATION is where Marginal Benefits equals Marginal Cost
Illustration of Marginal Analysis Table 1.2 shows the costs and benefits associated with undertaking the upgrading work. Someone without a training in economics may take the view that the upgrading the 6 km of dual carriage-way should take place because total benefits gained from the conversion would exceeds the total cost ($16.5m benefits > $12m costs). However, economists are more concerned with marginal benefits/costs than total benefits/costs. They would choose only to build only the first 4 km of the motorway because the marginal cost ($2m) of converting the second last mile exceeds the marginal benefit ($1m). This would be the most optimal solution to the problem.
Opportunity Cost • The sacrifice of the next best, or most rewarding alternative, use of a resource is called the opportunity cost of using it for the purpose chosen. • Opportunity cost is a real cost measure of what had to be given up in order to enjoy the benefit of the choice that has been made
Components Of an Economic System CONSUMERS(DEMAND) PRODUCERS (SUPPLY)
Production and Trade • Ancient society, life is basic and output low. Method pf production is inefficient as everyone unlikely to possess the same skills for every day task • Modern society – individual and business SPECALISE in the activities they are most efficientat undertaking and TRADE in goods and services they are less efficient in producing.
Benefit of Specialisation • Simplification of a function = specialization • Mechanisation • Intensive use of capital • Avoid wastage duplication of capital goods • Save time on repetitive tasks • Enables producers to achieve higher level of productivity • Able to produce SURPLUS to trade for goods and services individual cant produce • Evolution of……….. Markets
Markets • Institution which producers sell their surplus • Consumers buy the goods and services they do not produce themselves • Market enables buyers and sellers to interact and engage in exchange for goods and services
Different Economic Systems Solve the basic economic problems of: • how to allocate existing resources to different production processes and • how to allocate the resulting goods and services to different members of society, Three Economic Systems : • Pure market system • Command system (Centrally Planned) • Mixed system
Pure Market System • All the factors of production are owned by privateindividuals. • Maximisation of individual’s welfare (utility) is determined by Market Price consumers who are willing to pay for them and producers who are willing to supply • The commodities in higher demand will have higher prices than the less preferred goods and services. The higher prices make it more profitable to produce and sell the preferred goods. • Producers seeking to maximise their welfare (profits) will supply more of the profitable goods. • Market prices, the price mechanism determines what goods and services will be produced and the amounts to produce. • Price also determines how resources are distributed with the owners of resources in greatest demand receiving the largest income, whilst individuals with fewer resources or those in lower demand earning lower incomes. Individuals with higher incomes will be able to buy more goods and services, and subsequently have greater impact on what goods and services are produced. • Competition between producers in a market economy addresses the question of how to produce. Producers are forced to adopt the method of production with the least costs; otherwise they will incur losses and eventually may go bankrupt.
Command System • Production are collectively owned, and the decision-making process and organisation of resources are placed in the hands of a central authority. • The central planning body decides what will be produced, sets production targets and makes rules for distribution. Their decisions are based on what they perceive as the needs of society, which in turn will depend on the social costs and benefits associated with the activity. • There is no pricing mechanism to solve the problem of co-ordinating different production decisions. The government set the prices at which goods and services sell. Consumers choose what and how much to buy of the commodities available. • Under this system, it is not uncommon for gluts of some commodities to occur, whilst there are acute shortages of other goods and services. These shortages and excesses are taken into account when planning the next output targets. • Over the last 10 years, this system has proven difficult to operate. A number of command economies in Central and Eastern Europe and the former Soviet Union have collapsed. These economies have undergone major reforms. • Privatisation of collectively owned companies, restitution of property rights, and the liberalisation of pricing are common free market elements that have been introduced in these economies.
Mix Market • The balance between the free market and central planning elements, and the type of government intervention will differ from market to market as well as from country to country. • One role that the government may play is in the production of certain goods and services. These goods and services are those that the free market willnot produce despite people wanting and being willing to pay for them. The benefits of these goods and services may be social or collective where everyone gets to enjoy the benefits whether they pay for them or not. For example, the provision of the police force, an education system, open park area or community facilities. • Government intervention may also be necessary to regulate the activities of private entrepreneurs whose drive for profits may result in them making decisions that are bad for society as a whole.
COMPETITION • Markets work best when they are competitive. Forces producers to choose the most efficient methods of production. When market failures reduce the degree of competition and efficiency in the market, then governments may need to take actions to protect the interests of consumers. • In addition, the government may get involved in a market system to reduce inequality in the welfare of its members by redistributing income. Taxation, unemployment benefit, social security benefits and pensions for the elderly are mechanisms commonly employed by governments to redistribute income. • In mixed economies, land management activities are dominated by market exchange. Although the market dictates the structure of values, the state undertakes a degree of interaction. • They may indirectly control the activities of developers and landowners by imposing regulations, and adopting certain fiscal and monetary measures.
Key Micro-Economic Concepts in Lesson 1 • Resources are scarce relative to the demand made on them by society • Every economic system must decide what for and how to use their resources, and to whom will they allocate these resources • The law of diminishing marginal utility states that the more of a goods that one consumes, the less additional utility another unit can add.
Key Micro-Economic Concepts in Lesson 1 • Marginal Analysis is a useful analytical tool for solving problem involving optimisation • Opportunity cost measures the cost of not using scarce resources to produce a particular good or service
Key Economic System Concepts in Lesson 1 • In complex societies with many members, production must satisfy a wide range of wants and preferences. In order to satisfy these demand efficiently, producers must SPECIALISE. • Producers are individuals or groups of people who produce a good or service by transforming resources into outputs • These output are exchanged in markets
Key Economic System Concepts in Lesson 1 • Consumers are individual or household that buy these products. They seek to maximise their utility but are subjected to income constraints • Every economic system has a mechanism for transforming resources into useful form
Key Economic System Concepts in Lesson 1 • Market Economies – pricing mechanism rules, individual free to pursue own interest without government intervention • Command Economies – central authority decides what will be produced, how it will be produced , the price charged and who will get it In real world, no pure of market or command economies. Usually a mixed to protect members within its society
