Contemporary Construction - Economics and Finance

3. Capital

Capital consists of equipment, plant, construction materials, machinery and other commodities needed for construction. If capital is to be scarce, the construction industry will suffer greatly. These increased demand, can be met by other means such as importation.

C. Addressing the Consumption of Goods and Capital

The consumption of goods and capital is highly dependent upon the supply and demand. Supply is the amount of goods that are either able or just willing to sell at a given price. Demand is the amount of good that consumers, based on their needs and wants, are willing and able to buy at a given price.

1. Factors that affect Demand

1. Price of Other Goods

This can be of two types, goods can either be complementary or competing. Complementary goods are goods that go together such as undercoat and gloss paint. If the price of the gloss paint will increase, the demand for the undercoating will also decrease even if its price remains the same.

Wall paper can be considered as paint’s competition. If the price of either one is to increase, the demand for the competition in likely to increase and vice versa.

2. Change in a Person’s Income

An increase in a person’s income will increase the demand for commodities that he can now afford and buy that he cannot afford before.

3. Change in Taste

Taste dictates trends such as fashion, clothes, cars, music, hairstyle,  drinks and cigarettes. Change in taste can cause sudden changes in demands.

4. New Technologies

Newer technologies often make older  products obsolete. Therefore the demand for the older products disappears and transfers to the newer technological products.

5. Population

Simply, the more the consumers are, the more the demand will be.

6. Taxation

Taxation can be used to reduce the demand. Taxes on imported goods can be raised to increase their market price, and compel people to support local goods.

2. Factors of Production

A.

Resources are technically known as the factors of production. They are used in the production of goods and services in the economy. Economic resources can be classified into land, labour and capital goods.

1. Land

Land is composed of the natural resources used in the production process whose supply is fixed. Land can be geographical areas, organic resource and inorganic resource. In this occasion, the 2012 London Olympics, all three types of land are important.

Geographical areas will be the amount of land used to build infrastructures and buildings. Athlete accommodations, domes, stadiums and other sports facilities are just some of the buildings that are needed by the Olympics. Infrastructures are mostly centred on the transport sector, to be able to give a convenient mean of transport for athletes, spectators and other people living their ordinary lives.

Organic resources are renewable resources that can be replaced biologically. These resources can be reproduced and therefore are finite. The construction for the Olympics will be getting timber from these organic resources.

On the other hand, inorganic resources are finite and non-renewable. Steel, glass, concrete and plastic that are highly on demand for the Olympic Constructions are from mineral deposits.

2. Labour

Labour, also known as human resources, is the simplest to define among the factors of production. As a factor, it is the skill and effort spent and given by manpower including technical and marketing proficiency. It includes not only those who are directly involved in producing the commodities (skilled, semi-skilled workers), such as bricklayers, carpenters, and equipment operators, but also those who supply the service like architects, engineers and other professionals and technicians.

3. Capital

Capital in an economic sense is different from “capital” in accounting aspects. Capital is the goods used to produce further goods and/or services. In economics, it is not limited to money alone, it also includes plant, equipments, machinery, raw materials and any other commodities used in production.

4. Entrepreneurship

Enterprises are businesses or organisations that are led by entrepreneurs. Entrepreneurs organize other productive resources to make goods and services. Economists consider them as a specialist form of labor input. The success and/or failure businesses more often than not depend on the quality of entrepreneurship.

Entrepreneurs recognises profit making opportunites and organises factors to acquire that profit. The entrepreneurial function is complex, therefore, the role is vested to many specialists or a team.

B. ALLOCATION OF RESOURCES

1. Scales of Preference

It is the study of the consumer’s wants, like a list, in relation to the manner of what will give them the greatest amount of satisfaction within a society. This list will be different from one person to another.

For example, a consumer wants the following:

7. 2 Storey House
8. Garden
9. Conservatory
10. Garage
11. Swimming Pool

If the list is ordered by preference, then the consumer will get the most satisfaction from having a 2-storey house constructed. The next is having a garden, and so on.

Enterprises, say construction companies, can use this scales of preferences to know what the public wants. This can be at most use with companies in the Design and Build business and Real Estate businesses.

2. Utility

Utility is the ability of a good to satisfy consumer’s wants, but in economics it is not how useful a good is. Economists use marginal utility to measure satisfaction. Marginal utility is the amount of satisfaction gained from acquiring an extra unit of good.

In the construction industry, this can be used in ordering construction materials. For example, due to the 2012 Olympics, construction materials will be in high demand, therefore the chance of scarcity is high. Realising this, a contractor with several contracts, expected a shortage and ordered as much as he can. The first load generated high satisfaction because it was utilised properly. As more bricks arrive and the brick stock increases, his worries decreases resulting to less satisfaction from acquiring the good.

3. Economic Problems

Entrepreneurs make forecasts by scientific means or by just pure instinct. They make forecasts by answering through research and brainstorming the basic economic problems of the society. Before producing new goods and services, these problems are also resolved.

The following from Economics for the Construction Industry, R. Shutt are the three basic problems that should be resolved:

1. What commodities, and how much of each shall be produced?

• Are investment or consumption goods wanted?
• Is the society developed or underdeveloped?
• Is production for home consumption or for exportation?
• What are the input factors?
• What forms of goods shall be produced?
• Is there competition from abroad?
• What government policies are likely to affect the production of the goods considered?

2. How are the goods to be produced?

• Will it be labour or capital intensive?
• What are the levels of unemployment?
• Should there be investments on heavy plant equipments for production?
• Is it to be a large or small-scale production?
• What types of resources aside from labour are available?
• What government policies are likely to affect production methods?

3. For whom are the goods to be produced?

• Is the demand from within the country or from other countries?
• How are export markets likely to be affected by government decisions?
• Are the goods to be produced for government, business enterprise or individuals?
• How are the goods to be distributed amongst the consumers?

4. Types of Economy

The three problems can be affected by government action. The types of economy are the planned economy, free economy, and the mixed economy. Planned economies are controlled by central government planning, just like those in communist countries wherein the State intervenes with the industry.

The complete opposite of the planned economy is the free economy. In a free economy, there is no State interference in production or trading the enterprises can work unhindered. Also, the Price Mechanism works perfectly in a free economy.

Most countries operate in a mixed economy. A mix economy is between a planned and free economy. Mix economy has a certain amount of government intervention such as in areas of taxes, interest rates, grants, and subsidies.

C. PRINCIPLES BEHIND THE CONSUMPTION OF GOODS AND CAPITAL

1. Elasticity of Demand

Demand is the amount of good that consumers, based on their needs and wants, are willing and able to buy at a given price.

Elasticity of demand is the response of the demand from a change in price (either an increase or a decrease).

Elasticity of demand = % of change in demand / % change in price

If the figure is greater than 1 then it is relatively elastic. If the figure is 1 then it is unity elastic. If the figure is less than 1 then it is relatively inelastic.

1. Factors Affecting the Elasticity of Demand

1. Proportion of Income Spent on a Commodity

If the price of a commodity that takes up a small part of the budget, it would be negligible. But, if the price, changed on a commodity taking up a large part of the budget changes, the demand will be most likely be affected.

2. Level of Consumer’s Income

Consumers with large income consider most of its purchases as inelastic while consumers with small income consider most purchases as elastic. Simply because, if a commodity cannot be afforded, it wont be bought, and vice versa.

                        

3. Substitutes

If a good has no substitute, it can be considered to have an inelastic demand. The reason behind it is, if a good has a cheaper alternative that performs the same quality, consumers will definitely go for the cheaper product.

4. Luxury / Necessity

Necessity such as food, shelter, water are inelastic. Necessities should be purchased because they are needed for survival.

With luxury items, it can be considered as elastic, for as people can live without them.

5. Single / Durable Use Commodity

Goods that can be used more and are durable have inelastic demands because these goods do not need to be replaced often.

6. Trends

Goods linked with trends are inelastic, simply because trends come and go fast.

2. Elasticity of Supply

Supply is the amount of goods that are either able or just willing to sell at a given price.

Elasticity of supply is the response of the demand from a change in price (either an increase or a decrease).

Elasticity of supply = % of change in supply / % change in price

Supply’s elasticity is mostly determined by the ease of changing the levels of operations. Products with long production periods have inelastic supplies. If production can be stopped or changed easily, then the level of production can be altered to meet the existing circumstances instantly.

3. Equilibrium Price

Equilibrium Price is the result of the interaction of supply and demand when their graphs are combined. It is the point wherein the demand meets the supply.

3. Mobility of Labour

Labour mobility is the ability of workers to change location geographically and occupationally. Geographic mobility can be further subdivided to short-distance and long-distance moves, and into voluntary and coerced migration.

Labour or human-resource within London is most likely not enough to meet the demand created by the Olympic Games, therefore labour force from other regions within the UK will play a vital role. Labour force, willing to relocate within the EU will also be of great help to seal the gaps created by this sudden increase of demand.

Mobility also allow people with high levels of skills and aspirations from other locations find better jobs and get better opportunities. Reallocation to different sectors makes possible the use of better technologies that is currently not being used by others. This mobility need can also induce industrial growth.

On the down side, this sudden mobility need can cause overpopulation. This can also lead to illegal immigration if companies are to exploit the lower labour fees that these illegal immigrants charge.

4. Labour vs. Capital Intensive

Labour refers to the people that carry out the work in production while capital refers to the equipment, machinery, vehicles and other commodities used in production.

Obviously, labour intensive projects require a virtually high number of labour compared to capital investments. Nowadays, labour intensive production will only be advantageous to use in individual, personal, and small-scale projects. Labour costs is not limited to wages, others costs can include benefits, recruitment, and training. Flexibility in increasing and decreasing production levels can be achieved through overtime, temporary hiring and by laying off workers.

Capital-intensive productions, on the other hand, require a higher amount of capital investment compared to labour costs. In short, this type of production requires more funding and is therefore more suitable for large-scale projects. Capital serves as a long-term investment and the cost of financing, maintaining, and depreciating represent a substantial overhead.  Increasing and decreasing production levels in a capital-intensive situation is costly and time consuming.

The productivity per man of capital-intensive situations is much higher than labour intensive situations, assuming that the outputs are of similar products. More men in a labour intensive situation will be needed to equal the output of capital-intensive production. Also, labour intensive projects are more likely to suffer from the Law of Diminishing Returns. This law states that successive application of the other inputs to a given amount of a fixed input, will yield proportionately less output after a certain point. In a simpler sense, there is a limit to achieving an increased production when adding further labour. Simply because, there will be a point where further labour and/or machines will just cause overcrowding within the area. This law also affects machines, capital-intensive production produces more, and it is more advisable to use them rather than labour.

Since the 2012 Olympic Construction Projects are large-scale projects, Capital Intensive Production are more suitable for it.

5. Growth/Survival of Companies

Companies grow and survive through integration. Integration is a process of combining or accumulating. There are two types of integration, vertical integration and horizontal integration.

1. Vertical Integration

Vertical integration is where an organisation controls its input, distribution, and services. Firms can backward integrate by acquiring their suppliers while firms can forward integrate by taking control of its distribution.

Vertical integration results to lower transaction costs and a higher degree of control. In the construction industry and in any other business field, lowering costs will be of great help to competitiveness. Construction Companies are more likely to be seen to backward integrate. Construction firms can integrate with construction material distributors, and further integrate to factories. With this scenario, all of the three are likely to benefit. Construction firms can acquire cheaper materials, while the distributor and the factory have constant companies to supply to, which in turn give them a sense of stability and peace of mind.

2. Horizontal Integration

Horizontal Integration is a strategic move to expand and gain a greater market share. This means businesses at the same chain level are acquired. This type of integration can often be seen when a company is in the brink of closure and a company buys it out.

Companies can generate a great deal of advantages with horizontal integration. Competition and substitute products can be acquired to gain a greater market share. Companies can also acquire firms within their field of expertise.

In the construction industry, a firm can be competitive by acquiring other firms within the same industry but of different specialty. For example, a civil engineering company can acquire electrical, mechanical, and building services engineering companies to gain flexibility, offer a variety of services that other companies can’t and form a package.

In economics, the bottom line is money, and horizontal integration means more capital (accounting). More capital means that smaller companies can now take on bigger projects that they usually cannot take on before the integration. In making decisions on who to award a project after tendering, the company size of the tenderers are influential to the decision. A company with more capital (accounting) are more likely to finish the job and perform the job better than smaller companies.