REAL 661 Lecture 1 Final PPT PDF

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09-08-2019

Doc :No: RICS-SBE/XX/XX/S006/R02 Revised on: 24-05-2019

REAL 661 Economics for Built Environment MBA CPM, MBA CEQS & MBA REUI Nihar Nanyam, Arun Ahuja & Brijesh Bhatt

Course Details Course Title

Economics for Built Environment

Program

MBA CPM & MBA CEQS Semester

1st

Course Code REAL 661 Credit Units

Notional Hours

Total credit units

L

T

P/S

SW/FW

2

1

0

2/0

L

T

P/S

SW/FW

4 Total Teaching Hours

2

1

0

2/0

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Student Learning Outcomes •

To demonstrate an understanding of the economic logic driving business decisions (M008)

•

Interpret and access the key economics parameters behind decisions taken by households and businesses on a day to day level (M008) Develop an ability to understand the operation of the Indian and global economy (T039,M009) Interpret macro economy conditions in terms of business requirements (T039)

• • •

Develop an ability to apply economic concepts in analyzing specific property and regulatory problems in the real estate industry (M011,M009) Competency

Type

Data management

Mandatory

Economic development Diversity, inclusion teamworking Sustainability

Technical and

Mandatory Mandatory

Code M008 T039 M009 M011

Course Content Module to I – Introduction An introduction to basic concepts Module II – Key issues in Economics Economic systems for resource allocation, Theory of Demand, understanding changes in demand, changing market conditions, elasticity of demand. Behavioural Economics, Theory of Supply, Supply in the construction industry, Changes in Supply, Elasticity of Supply, Combining supply and demand

Weightage 10%

25%

Module III – Firms, Markets and Government Clients and Contractors – economic agents in the BE Cost of the construction firm, production, economies of scale, diminishing marginal returns. The interplay of Costs, Revenues and Profits, (Additional integrative readings). Markets, Market Mechanisms and Market Structures. Market failures and government intervention – what causes market failure, free rider, externalities, information asymmetry, government intervention

30%

Module IV – Macroeconomics Macroeconomy, Economy and Construction, Inflation, Expectations and the big picture. Government policy instruments – monetary policy, fiscal policy, direct policy, macroeconomic objectives and policy, macroeconomic management International Economics – introduction. The economy and construction, GDP and growth, GDP and construction, leakages and injections, aggregate demand, aggregate supply, increasing capacity in the long run Inflation and expectations, Cost of Living Indices, causes and cures of inflation, credit crunch, quantitative easing, rational expectations. Sustainable Construction, role of markets, circle of blame, role of governments

35%

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Weekly Session Plan Week

Week 1

Lecture Topic (2hr/week) Course Guide Introduction and Discussion An introduction to basic concepts

Summary of M1 Introduction Economic systems for resource allocation Theory of Demand, understanding changes in demand, changing market conditions, elasticity of demand Week 3 Theory of Demand, understanding changes in demand, changing market conditions, elasticity of demand Theory of Demand, understanding changes in demand, Week 4 changing market conditions, elasticity of demand Behavioral Economics Theory of Supply, Supply in the construction industry, Changes in Supply, Elasticity of Supply, Combining supply and demand Week 5 Theory of Supply, Supply in the construction industry, Changes in Supply, Elasticity of Supply, Combining supply and demand Week 2

Tutorial Self Work (1hr/week) (2hr/week) Introduction to Preparation of project Project Assignment brief and detailed and Project introduction allocation Study of Indian Problems on opportunity cost construction industry Problems on demand and supply Problems on demand and supply

Extensive study for the case study discussion

Discussion on Case Study

Extensive study for the case study discussion

Weekly Session Plan Week Week 6 Week 7

Week 8 Week 9 Week 10

Week 11

Lecture Topic (2hr/week) Summary of M2 Key issues in Economics Clients and Contractors – economic agents in the BE Clients and Contractors – economic agents in the BE Cost of the construction firm, production, economies of scale, diminishing marginal returns Cost of the construction firm, production, economies of scale, diminishing marginal returns The interplay of Costs, Revenues and Profits. MID TERM TEST Markets, Market Mechanisms and Market Structures Market failures and government intervention – what causes market failure, free rider, externalities, information asymmetry, government intervention Market failures and government intervention – what causes market failure, free rider, externalities, information asymmetry, government intervention Market failures and government intervention – what causes market failure, free rider, externalities, information asymmetry, government intervention Market failures and government intervention – what causes market failure, free rider, externalities, information asymmetry, government intervention

Tutorial (1hr/week) Problems on elasticity Problems on short run and long run costs Problems on short run and long run costs Discussion on test paper Presentation on Project Assignment

Presentation on Project Assignment

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Weekly Session Plan Week

Week 12

Week 13

Week 14

Week 15

Lecture Topic Tutorial (2hr/week) (1hr/week) Macroeconomy, Economy and Construction, Inflation, Expectations and the big picture. Problems on Macro Macroeconomy, Economy and Construction, Inflation, Expectations and the big economics picture. Government policy instruments – monetary policy, fiscal policy, direct policy, macroeconomic objectives and policy, macroeconomic management International Economics – introduction Problems on Macro Government policy instruments – monetary policy, fiscal policy, direct policy, economics macroeconomic objectives and policy, macroeconomic management International Economics – introduction The economy and construction, GDP and growth, GDP and construction, leakages and injections, aggregate demand, aggregate supply, increasing capacity in the long run Problems on Macro economics The economy and construction, GDP and growth, GDP and construction, leakages and injections, aggregate demand, aggregate supply, increasing capacity in the long run Inflation and expectations, Cost of Living Indices, causes and cures of inflation Problems on Macro credit crunch, quantitative easing, rational expectations economics Sustainable Construction, role of markets, circle of blame, role of governments

Assessment

End Term Examination : 50% Internal Assessment : 50% 10% for Home Assignments and class participation End Term Examinati on

Continuous Assessment / Internal Assessment

Components Weightage (%)

Project / Home Assignments

Quiz

20%

10%

Class Test

Attendance

15%

5%

50%

4

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References 1. Construction Economics – Danny Myers 4th Edition, Routledge 2. The Economics of the Modern Construction Sector – Graham J Ive and Stephen L Gruneberg, 2000, Macmillan Press 3. The Economics for the Modern Built Environment – Leslie Ruddock, 2009, Taylor and Francis 4. Economics - a foundation course for the built environment – J L Manser, 2005, Taylor and Francis Group 5. Urban Economics and Real Estate Markets – Denise DiPasquale, William C Wheaton, 1996, Pearson Education 6. Economic Analysis for Property and Business, Marcus Warren, Routledge, 2011 7. Stiglitz, J.E. and Walsh, C.E. (2006) [SW]. Economics, W.W. Norton and Co. 8. Pyndick and Rubinfield (2008) [PR]. Microeconomics, Wiley India 9. Dornbusch and Fischer (2007) [DF]. Macroeconomics, McGraw Hill India 10. Deepashree, Principles of Micro Economics, Ane Books Pvt Ltd, New Delhi 11. Deepashree, Vanita Agarwal, “Macro Economics”, Ane Books Pvt Ltd, New Delhi

An introduction to basic concepts

Lecture 1

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Five myths about economics and an economics major • Economics is all mathematics and statistics • Economics is only about inflation, interest rates, unemployment, and other such things • People become economists only if they want to “make money” • Economics wasn’t very interesting in high school, so it isn’t going to be interesting now • Economics is a lot like business, but business is more marketable

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 engineers Facility managers and economists Providers of goods and services\delivery, transportation, demolition, disposal etc.

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Parties Involved in Supply Responsibilities • Architects and Designers Provide specialist advice concerning structural, electrical, mechanical and landscape details. Identify key specifications. • Project Manager Manages project in detail. Liaises between the client and the construction team. • Cost Consultant Prepares bills of quantities, cost plans, etc. • Main Contractor Manages work on site. • Subcontractors Supply specialist skills. • Suppliers Provide building materials and related components.

Sectors of Construction Industry

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Scarcity Two facts dominate our lives.

We have limited resources

We have unlimited wants

Resources Resources can be defined as the inputs used in the production of those things that we desire. resources as factors of production to highlight the fact that only by combining various factors, goods and services can be produced. Factors of production are classified as : • Labor 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. • Entrepreneur is the resources that organizes labour, land and capital.

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Introducing construction economics In an attempt to reconcile this problem, economists argue that people must make careful choices—choices about what is made, how it is made and for whom it is made; or in terms of construction, choices about what investments are made, how these are constructed and on whose behalf. Indeed, at its very simplest level, economics is ‘the science of choice’. Construction economics is concerned with the allocation of scarce resources. Economics may appear to be the study of complicated tables and charts, statistics and numbers, but, more specifically, it is the study of what constitutes rational human behavior in the endeavor to fulfill needs and wants.

Opportunity cost When a choice is made, therefore, some other thing that is also desired has to be forgone. In other words, in a world of scarcity, for every want that is satisfied, some other want, or wants, remain unsatisfied. Choosing one thing inevitably requires giving up something else. An opportunity has been missed or forgone. To highlight this dilemma, economists refer to the concept of opportunity cost. One definition of opportunity cost is: the value of the alternative forgone by choosing a particular activity. For example ,construction firms deciding which projects to proceed with. This way of thinking emphasises that whenever an economic decision is made there is a trade-off between the use of one resource for one or more alternative uses. From an economic viewpoint the value of a trade-off is the ‘real cost’—or opportunity cost—of the decision

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Opportunity Cost

Example Option 1 going to a 1 hour concert and pays $200 for a ticket Option 2 working as a salesman earning $30 per hour Option 3 working as a tutor earning $100 per hour Full cost of attending the concert = price of ticket + income forgone (highest-valued option forgone) Full cost of attending the concert = $200 + $100 = $300

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Opportunity cost Suppose you have been offered a choice of two part-time jobs: 10 hours a week stacking shelves at the supermarket for $10 dollars an hour; or 12 hours a week working in the bar of the local hotel for $8 per hour plus a free case of beer once a week. Assuming that you will take one and only one of the jobs, what is: the opportunity cost of taking the supermarket job? the opportunity cost of taking the hotel job?

Answer:

(i) $96 plus a case of beer (ii)$100 plus 2 hours of leisure

Opportunity Cost A plot of land could have several possible uses: develop shopping centre develop office block develop private housing estate Suppose that after doing an initial feasibility analysis, the land owner estimates that he can make the following profit from each option: shopping centre = $10 million office block = $5 million housing estate = $8 million Q: What is the best economic use for the land? Q: What is the opportunity cost associated with this use?

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Examples of Opportunity Cost Tony buys a pizza and with that same amount of money he could have bought a Coke and a hot dog. The opportunity cost is the Coke and hot dog. As a consultant, you get $75 an hour. Instead of working one might, you go to a concert that costs $25 and lasts two hours. The opportunity cost of the concert is $150 for two hours of work. David decides to quit working and got to school to get further training. The opportunity cost of this decision is the lost wages for a year. When Rohan graduated high school, he decided to go to college. The opportunity cost of going to college is the wages he gave up working full time for the number of years he was in college. Mario has a side business in addition to his regular job. If he decides to spend more time on his side business, the opportunity cost is the wages he lost from his regular job.

Tradeoff & Opportunity cost • Sacrifice of one thing to obtain another is called TRADE OFF, while the thing sacrificed is called OPPORTUNITY COST. • It means trade off is a process of selection while opportunity cost is thing that is sacrificed/not selected. • In construction, or any other economic sector, it is rare to experience a constant opportunity-cost ratio, in which each unit of production can be directly adapted to an alternative use • It is far more usual in business trade-off decisions to see each additional unit of production cost more in forgone alternatives than the previously produced unit. This rule is formally referred to as the law of increasing opportunity costs.

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Opportunity Cost

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Opportunity Cost ----  PPC

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Production Curve

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Production Possibility Curve •

•

Points b,c,d,e are connected with a smooth curve, PPC is obtained which demonstrates tradeoff. These trade-offs occur on the production possibility curve. The curve is bowed outwards to reflect the law of increasing opportunity cost. If the trade-off is equal, unit for unit, the curve would not bow out, it would simply be a straight line

it does represent a target for the future

inefficient use of available resources

Production Possibility Curve • The law of increasing opportunity costs is easier to explain using a production possibility curve. Using these curves, it is possible to show the maximum amount of output that can be produced from a fixed amount of resources. • 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. • The production possibility frontier (PPF) is the boundary between those combinations of goods and services that can be produced and those that can not. • The production possibility frontier (PPF) represents the point at which an economy is most efficiently producing its goods and services and, therefore, allocating its resources in the best way possible. If the economy is not producing the quantities indicated by the PPF, resources are being managed inefficiently and the production of society will dwindle. The production possibility frontier shows there are limits to production, so an economy, to achieve efficiency, must decide what combination of goods and services can be produced.

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Opportunity cost • 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 , 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 • 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 .

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Production Possibility Curve – Draw for the data

Production Possibility Curve

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