Booms and Busts in the Construction Industry - Report Example

College BOOMS AND BUSTS IN THE CONSTRUCTION INDUSTRY The booms and busts in a normal economy bring about several resultswhich may impact an industry either positively or negatively. The construction industry is not an exception. The end result of booms is high prices and reduced competition because of full order books. The busts on the other hand, bring about reduced profits, an increased pressure on quality and cutting costs due to competition (Griffiths, 19). There should be proper government intervention in order to level the forces which are evident in the industry. This may take the form of setting price floors and ceilings. Booms in the construction industry There are several factors which are source of boom in the construction industry. These include reconstruction and development for instance; the commissioning of electricity plants which assist in development of a good road network which assist in construction industry like in transportation of materials used in the construction site. In addition, growth in private sector ann example like in the retail and residential sector offer a boost to the growth industry. In such a case, there will be more bookings leading to a booming activity in the industry. The increase in construction activities is due to good government policies for instance in the United States where there are initiatives to mandate new buildings for instance by having partnerships with private Housing Associations. In some countries like India, construction accounts for growth in GDP after Agriculture. This is because the high population in the country provides cheap labor to the industry. It means therefore that where the industry is dependent more on labor than mechanization, then where there are a lot of people then they offer cheap labor to the industry. In the recent times, there has been an increased funding into the construction industry giving very friendly mortgages which helps to boost the industry by having enough capital for the smooth running of the activities in the industry. In addition, many organizations are taking advantage of expansion and are therefore increasing their office space. This in turn has a positive effect in the industry by increasing orders which increases the opportunity available to the industry. During the boom, there is a decrease in the construction costs mainly because of fall in prices of construction materials and even reduction or total elimination of material delivery fuel charges and increased competition among the contractors (Griffiths, 20). Busts in the construction industry. According to Jonathan Hook, a construction and house building leader at Price Waterhouse Coopers, the few barriers to entry in the industry especially during the boom time allow many non-performing industries to enter the market. This leads to a further contraction of activities in the long run because the small industries are phased out of the industry. In addition to this, there comes a situation when labor becomes inadequate and impacts negatively on the industry because in such a case labor becomes expensive therefore reducing long run company profit. Sometimes labor goes out of a country leaving a gap in the labor market and this has a bad effect on the industry because there will be no people to work in the construction projects. Some construction industries are going bust because clients are not paying their dues and other projects are cancelled. When clients fail to pay the fee required by the contractors, they drag their efforts because the contractors can not meet their expenses. When this happens, contractors are not able to pay their overhead and manpower costs leading to a substantial decrease in revenue. Another factor that is affecting the industry is that, most industries depend on banks for their funding and in the recent times, the financial institutions have not been clear on whether they are going to give developers and investors in the industry more funds. This is because of freezing in the credit markets and collapse in the real estate market (Griffiths, 24). The private sector is the dominant investor in the construction industry. This trend can only be reversed by having public- private sector partnerships and good mechanisms to improve the sector because private sector investment has not reached the expected levels. Another bust in the industry is the idea that most construction companies have full order books meaning that they will strive to complete work assigned but they do the work poorly and with haste because they are hurrying to serve another customer. The quality of materials used in the industry is also questionable because most of the materials do not meet the safety standards and the resultant buildings will be in turn of poor quality (Griffiths, 26). To reduce the effects of boom and bust therefore, governments should intervene in the construction industry by regulating the entrance into the industry. The result of this will be to decrease competition and thereby check on the number of players in the market. It will in turn lead to an improvement in quality. The government may also set ceilings and floors for wages in order to ensure that wages paid do not impact negatively on revenue to be earned in the long run. Materials for construction should also be analyzed in order to keep quality and phase out competition. Money and Nuances of Money Money can be defined as a commodity or asset such as gold or officially issued currency which can be legally exchanged for goods or services of equivalent value. Legally, money can be defined as an authorized medium of exchange. It can also be anything that is used as a medium of exchange, store of value or means of payment. Money therefore assists in conduct of business by enabling transactions to be completed (Griffiths, 28). Money has a negative effect on a person’s morals since it encourages the individual to do bad things. It makes people less concerned about others’ feelings and pains. In addition money creates class differences in people leading to disagreements among people in society. The desire to have money changes a person’s drive due to the anticipation to get the cash in order to satisfy needs. Factors That Affect Wages in the Construction Industry Labor productivity and market forces affect the wages paid. Productivity may be influenced by management efficiency and use of technology in production. In the construction industry, just like other industries, there are different, markets (competitive, monopoly and monopsony). There may also be union activities that set a floor for the minimum wage. Wages are therefore affected by Marginal revenue product meaning that the more work you do, the more you are paid. Wages will also be different according to the work done for instance plumbers and masons on a construction site are paid differently. Furthermore, considering the ability and education of workers in a construction site will bring out wage differentials because work quality will depend on the two factors. Monetary compensation like providing better working conditions, will also affect the wages because it will have the effect of increasing the expenditure. How Equilibrium Price Is Determined Equilibrium price is the market price at which demand and supply are in balance. For manufacturers however, it is the price that maximizes the product’s profitability. Equilibrium price is determined by the forces of supply and demand in a free market economy. An increase in supply will force the price down and will therefore mean that the price has to be increased in order to have a balance. This will only occur when there is a corresponding increase in demand to bring about a balance which results into an equilibrium price(Griffiths, 31). An increase in disposable income may also increase demand and price above the equilibrium. This means that supply will have to be increased in order to bring the prices down to equilibrium. However, in non-competitive markets like monopolies, price is determined by the key player (the supplier). Demand and supply forces do not operate in such markets. Consumer Sovereignty and What Affects It Consumer sovereignty refers to the way in which consumers chose to buy goods or services. Economically, it describes the power of consumers to decide what gets produced and brought to the market. It can only be effective in a free market economy where there is no interference from the government or other non-market or anti-market institutions like cartels and monopolies (Griffiths, 34). Consumer sovereignty is affected by many factors for instance monopolies which are the sole suppliers of goods and services. In this case consumers cannot dictate what they want because they cannot get another supplier for their goods and services when there is only one supplier for the goods and services they consume. In addition, consumer sovereignty is affected by factors like income which in turn affects the purchasing power. In the case where consumers do not have the purchasing power due to poor income then there is no consumer sovereignty. Work Cited Griffiths, S. Nine Construction Firms Going Burst Everyday. Oxford Publishers. Read More