ECONOMICS FOR CONSTRUCTION (managerial course)

 What is management?
o Decision Making
 Problem definition
 Alternative solutions
 Evaluate alternatives
 Choose the best alternative
 Study of economics is going to help in decision making.
 Economics = uses of scarce resources optimally for the satisfaction of the
need of the society.
o Wealth
o Welfare
o Scarcity
o Growth
 It is study of how to make best use of scarce resources for the welfare of
the people keeping in mind the growth aspect.
 Business economics
o Application of economic principles and theories for the decision
making in the business
o A study of Production, distribution & Consumption of goods and
services
 Construction economics
o Application of economic principles and theories for the decision
making in construction business
 Characteristics of construction industry
o Divided in two parts, infrastructure and residential
o Contributes almost 8 % of GDP of India
o Employs 35 million people in the country / 2nd largest employer in
the country after agriculture
o Good infrastructure deficit in the country / great potential for
further development
o 100 % FDI
o Supports many other industries like cement, steel, paint etc.
o Dominance of unskilled and semi-skilled worker
 o Lack up gradation of skills
o Outdated technology and equipment
o Lack of proper safety measures
o Presently real estate is buyers market.
 3 important focus in economics
o Opportunity cost - benefit scarified on second best opportunity –
implicit cost- later on to be proved with the help of a case
o Efficient market - where further profit opportunities are seized
(do not exist) - (examples)
o Concept of marginalism - marginal cost - cost of an extra unit
 Marginal revenue – revenue from one extra unit
 Micro economics - study at the level of a firm
 Macro Economics – study at the level of the economy as a whole
 Scope of business economics
o Demand analysis and forecasting
o Cost analysis
o Production analysis
o Pricing decision under different market conditions
o Profit & capital planning
o Inflation
o National income
o Business cycles
o Monetary policy
o Fiscal policy
 Some important economics terms
o Wealth – stock of goods under the ownership of individuals or
nation
o Welfare – satisfaction or well being enjoyed by the individuals
o Production – creation of utility or addition of value; four factors of
production – land, labour, capital and organization – rent, wages,
interest, profit
o Consumption – satisfaction of human wants - determinants of
consumption – income, future income, wealth
o Income – inflow of purchasing power
 o Market – a system in which buyers and sellers interact either
direlty or indirectly
o Consumer surplus – difference between what a consumer is
willing to pay and what he is actually paying
o Diminishing marginal utility – subsequent consumption do not
give same value; hence do not command same price.
o Money – anything which can be used as a medium of exchange
o Investment –addition to capital stock
o Savings – income minus consumption
 HCC Vs. Aparna construction pvt ltd.
 Public ltd and private ltd.
o 2 – 50 in pvt ltd co. & 7 – unlimited in public ltd.
o Stock market trading
o IPOs
 Why companies are called best form of business?
o Economides of scale - benefits on operating bigger scale
o Limited liabilities
o Perpetual succession

DEMAND ANALYSIS
 WHAT DEMAND?
o Quantity of goods or services which customers are willing to buy
and able to buy at a prevailing market price at given period of
time.
o Desire of the people to buy backed by sufficient purchasing
power.
 Conditions to be satisfied for a demand
o Willingness
o Ability
o Value
o Given price
o For a given
 What is demand for apartments in india?
 o No. Of units of apartments people in india are willing and able to
buyfor a given period of time at the prevailing prices.
 Factors affecting demand / determinants of demand
o Qd = F(Po, Pc, Ps, Yd,T, Cr, R, A, N, E, O)
 Factors affecting demand for houses
o Price per sft
o Complementariness
o Rental values
o Income
o Changes in preferences
o Localities
o Housing loans
o Rates of interest
o Advertisement
o Quality
o No. Of buyers
o Expectation
o Others
 Demand schedule – relationship between quantitty and price expressed
in a tabular form
 Demand curve – graphical expression of price and quantity relation
o Individual
o Market
 Law of demand – other things like income of the buyuer, tastes and
preference etc remaining same, a fall in price of the good results in
increase in the demand and vice versl.
 why demand curve is downward declining one
o Income effect
o Substitution effect
o Law of diminishing marginal utility
o No. Of buyers
o Multiple uses
 Exceptions of law of demand - demand increases with price increase
and demand falls with fall in price
 o Share market
o Conspicuous goods
o Necessity
o Giffen goods/ inferior goods
o Bandwagon effect
o Veblen effect
 Two important terms
o Change in demand / movement along the demand corve- change
is the result of other factors (other t han price)
o Change in quanitity demanded / shift of demand curve - change is
the result of price change
 How much demand will change when factors affecting demand will
change by x % - elasticity of demand
o Elasticity is the responsiveness of demand to change for a given
change in the factors affecting demand.
 3 important factors
o Price
o Income
o Prices of related goods
 3 important types of elasticity
o Responsiveness of demand to change for a given change in price –
Price elasticity of demand (Ep)
o Responsiveness of demand to change for a given change in
income of the buyers – Income elasticity of demand (Ei)
o Responsiveness of demand for Good X to change for a given
change in price of Good Y – Price elasticity of demand – Cross
elasticity of demand (Ec)
 How to measure it
 (Ep) = % change in demand divided by % change in price
 Ei = % change in demand divided by % change in incomed
 Ec = % change in demand of good X divided by % change in price of good
Y
 Suppose EP is 5; how will you interpret?
o For every one % increase in price, demand is going to fall by by 5%
 Suppose EP is 0.5; how will you interpret?
o For every one % change in price, demand is going to change by0.
5%
 Suppose Ei is 5; how will you interpret?
o For every one percent increase in income, demand will increase by
5 %.
o
 Elasticity can assume various values ranging from zero to infinity
o Ep = 0: perfectly inelastic; no change in demand for whatever
change in price.
o Ep < 1 - relatively inelastic; change in demand is lower than
change in price
o Ep = 1; unit elasticity ; same change in demand & price
o Ep > 1 : relatively elastic; change in demand is greater than change
in price
o Ep = infinity; Perfeclty elastic; huge change in demand for no
change or very small change in price
 Factors affecting elasticity of demand
o Nature of the good
o Availability of substitutes
o Variety of uses
o Possibility of postponement
o Durability
 What is going to the elasticity of demand for houses?
 Change in price
o Significant – forms a arc in the demand curve - we are measuring
arc elasticity of demand using the above formula.
o Insignificant change in price – point elasticity of demand - lower
portion of the demand curve divided by the upper portion of the
demand curve
 On a straight line demand curve,
o At the middle most point, Ep = 1
o At the upper most point, Ep = infinity or demand curve will parallel
to quantity-axis if demand is perfectly elastic.
 o At the lower most point, Ep =0; demand curve will be parallel to
price-asix if the demand is perfectly in elastic
o Above middle most point, Ep > 1; change in demand will be m ore
compared to change in price, if demand is relatively elastic.
o Below the middle most point, Ep < 1; change in demand will be
less compared to change in price, if demand is relatively inelastic
 Usefulness of the concept of the elasticity
o Pricing decision - (whether to i increase or decreased the price)
 If demand is relatively elastic, decrease in price will result in
increase in TR
 If demand is relatively elastic, increase in price will result in
decrease in TR
 If demand is relatively inelastic, decrease in price will result
in decrease in TR
 If demand is relatively inelastic, increase in price will result
in increase in TR
o Monopolist - single seller without any substitute products - price
differentiation
o Govt Policy
o Foreign trade - import and exports
o Factor pricing
Production functions
 Creation of utility / addition of value
 A process of transforming inputs into output
 Inputs – land, labour, capital and organization
 Output - good or a service
 Production function = establishes a relationship between output and
input
 Q = f( k, l, ........)
 Before starting production, one needs to answer question like
o Whether to produce or not
o How many units
o What combination of inputs to use
 Production function - establishes a relationship between output and
input in such a way so that we get max output with minimum inputs
 Q = f(K, L) – two input production function where k is capital and L is
labour
 Q = f( K, L, ...........) - multiple input production function

 Some significant concepts
o Economic efficiency
o Technical efficiency
o Short run - time period during which all inputs cannot not
changed. - time under consideration is too short to adjust inputs.
o Some inputs are fixed and some are variable in short run
o Long run - time period during which all inputs can be changed
o All inputs are variable in long run.
 Short –run two input production function where one input (K) is fixed
and other input (L) is variable
 SOME IMPORTANT TERMS
o TP (TOTAL PRODUCT)
o AP (AVERAGE PRODUCT)
o MP (MARGINAL PRODU CT)
 Relationship between AP and MP
 Relationship between MP and TP
 3 stages of production
o Stage I
o Stage II
o Stage III
o Why not Stage I & III
 Profit is maximized where MR – MC.
 MR = extra revenue earned from an additional unit.
 MC = extra cost incurred for an additional unit.
 Long –run two input production function
o All inputs are variable
o If you double your inputs, three things can happen in long run
 Output is more than doubled – Increasing returns to scale
  Output is less than doubled – decreasing returns to scale
 Output is exactly doubled – constant returns to scale

COST FUNCTIONS
 Price = cost + profit
 What is cost?
 Sacrfice of resources
 Material cost + labour cost + overhead (manufacturing overhead, office
& Admin overhead, selling & distribution overhead
 Types of cost
o Direct cost and indirect cost
 Cost which can be directly identified with the product is
called direct cost.
 Cost which can not be directly identified with the product is
called indirect cost.
o Accounting cost and economic cost
 Explicit cost only is considered in accounting cost
 Both explicit and implicit (opportunity) cost will be
considered in economic cost.
 Example of implicit – salary of owner, interest on owner’s
capital etc..
 Example of explicit -– material cost, labour cost etc.
o Relevant cost and irrelevant cost
 Relevant for decision making
 Irrelevant for decision making
o Fixed cost and variable cost
 Remains same irrespective of volume of production
 Varies with the volume of production
o TC = TFC + TVC
o Ac =AFC + AVC
o MC = MARGINAL COST – ADDTIONAL COST INCURRED ON
PRODUCTING ONE EXTRA UNIT
o TFC REMAINS FIXED IN TOTAL
o AFC IS CONTINEOUSLY DECLINING
o TVC VARIES PROPORTIONATELY
o AVC REMAINS SAME
o SHAPES OF COST CUVES
 TfFC us a straight line parallel to quantity axis.
 Prtofit = TR - TC


TFC
250

200

150 TFC

100

50

0
0 100 200 300 400 500 600 700 800 900

 TVC curve is a upward rising curve.

TVC
600

500

400
TVC
300

200

100

0
0 100 200 300 400 500 600 700 800 900
  TC is also upward rising but starts from fixed cost value.

TC
800
700
600
500
TC
400
300
200
100
0
0 100 200 300 400 500 600 700 800 900

 Contribution = excess of selling price over variable cost

 = selling price per unit – variable cost per unit
 If contribution is negative, a firm is better off if stops
production.



1200

1000

800
TFC
600 TVC
TC
TR
400

200

0
0 100 200 300 400 500 600 700 800 900

 AFC falls as we increase our output because as we produce more same

amount of fixed cost gets distributed over more and more units of
output.
 AFC curve is a continuously falling curve.\
 It is a rectangular hyperbola.
 Shape of AVC
 Why AVC curve is U shaped?
 Relationship between AC & MC
 Relationship between AP & MP
 Relationship between AP & AVC
 MC is inversely proportional to MP
o When AVC is falling, MC is below AVC
o When AVC is minimum, MC will be equal to AVC
o When AVC is rising, MC will be above AVC
 Cost functions in short run
o TFC – STRAIGHT LINE PARALLEL TO QUANTITY AXIS
o TVC – UPWARD RISING CURVE STARTING FROM ZERO
o TC - UPWARD RISING CURVE STARTING FROM TFC
o AFC – CONTINEOULSY FALLING CURVE, NEVER REACHES ZERO
o AVC – U SHAPED CURVE, FALLS INITIALLY, REACHES MINIMUM
AND THEN STARTS RISING.
o AC – AFC + AVC; U SHAPED CURVE, FALLS INITIALLY, REACHES
MINIMUM AND THEN STARTS RISING
o MC – GIVEN THE RELATIONSHIP BETWEEN AC/AVC AND MC - U
SHAPED CURVE, IS EQUAL TO AC AND AVC AT THEIR MINIMUM
LEVEL
 Cost functions in Long run
o All cost are variable
o AC = AVC
o In long run, firms will react when cost is increasing.
o They will always try to minimize cost by importing or buying better
technology or equipments.
o Hence they will leave the existing cost function is when cost starts
rising.
o LRAC is the envelope of number of SRACs.
 MARKET

 Interaction between buyers and sellers

 Mechanism of price discovery
 2 important terms
o Market structure – degree of competition prevailing in the market
o Market power – ability of a single firm to influence market price
by changing its own supply.
 Inverse relation between MS and mp
 TYPES OF MARKET
o Perfectly Competitive Market / PCM (100% MS & 0 MP)
 Characteristics
 Large of no. Of sellers
 Homogenous product
 Perfect knowledge among the buyers about market
conditions
 No significant distance between sellers
 No control over market price
 Firms are price takers
 Price is dermined by demand and supply forces
 Individual firm can sell as much as it likes at the given
market price - Demand curve for individual firms in
PCM would be a straight line parallel to Quantity axis.
 Elasticity of demand - perfectly elastic - infinity
 Individual firm cannot impact market price by
increasing or decreasing their supply.
 Every firm wants to maximize profit by producing a
given level of output.
 Conditions for profit maximization; MR = MC
 MR = P
 What is the profit maximizing output in PCM?
 Short run (no entry of new firms or exit of old firms)
 o Situation no. 1
 Price is above AC, firms will earn super
normal profit: P = MR = MC > AC
 Price is below AC, firms will incur losses:
P = MR = MC < AC
 Price is just equal to AC; firms will break
even; P= MR = MC = AC
o Explain short equilibrium of a firm in PCM.

 Long run
o All costs are variable.
o Free entry (when existing firms are making
super normal profit) and exit of firms (when
existing firms are incurring losses)
o Monopoly Market(0 MS & 100% MP)
o Market for Housing (Monopolistic Market)