Construction Economics - Assignment Example

? Contents Index Pages Introduction 2 2. Economic activity of Government and the Construction industry 2 3. Government Intervention 6 4. Factors affecting economics of construction industry 7 5. Price Determination in Construction Industry 9 6. Allocation of Resources 10 7. Bias in Construction Industry 10 8. Conclusion 12 Construction Economics (#509808) Introduction The economics of construction is very vital to the growth of the country’s economy. However this industry is severely dependent on the robustness of the economic cycle at that point of time. These economic cycles form an important feature of a market driven economy. When the economy is booming the industrial sector achieves maximum growth and is said to be achieving its maximum potential. The total market value of all commodities and services that are provided within a country during a set financial period is defined as the country’s GDP or gross domestic product. (Best Aaron, 2007) Economic activities of the Government and the construction industry It is not always the policies followed by the government that affect economic activity. There might be several impediments happening in the international front affecting the construction industry. Recession is a key index that needs to be keeps a tab regarding the performance of an economy and how the economic activities of the government are affecting the industry as a whole. Some of these Recessions’ that the government needs to keep a tab on are (Blake et al, 2004) 1. Inventory Recession- Too much optimism regarding the future growth and potential of the market can cause an increase of production foreseeing future market prices of raw materials. This can lead to overstocking of both raw materials and finished items. However if the markets are not expanding with the same potential it leads to accumulation of stock leading to recession. 2. Rolling Recession- Due to an economic slowdown several sections of an economy are hit each to a certain degree which varies according to the nature of each sector. This dip in activity in one sector can severely hamper the prospects of another sector since all industrial processes follow close synergy of activities. Recovery in one sector might not lead to the same taking place in another sector. (Blake et al, 2004) 3. Unexpected political events, elections, wars, coups, natural and manmade disasters can also cause severe impediments in economic activity. 4. Wrong Government Policies- Every government follows a monetary and fiscal policy that it deems is best suited for that country. However mistakes on this front cause the government in incorrect borrowing and lending of money. This leads to extremely large fiscal deficit making the economy severely handicapped.( Verick Sher and Islam Iyanatul, 2010) 5. All banks operating in the public and private domain are assessed and regulated by institutions under the government. Inefficiency of these institutions leads to banks lending without assessing the paying capacity of customers. This can cause huge liability to the banks if the loans are not fully recovered. Instability in banks leads to capital shortage for industrial and construction development. 6. The vagaries of oil production in the OPEC countries can cause fuel price to shoot up severely. These activities directly affect the cost of construction raw materials since a large part of construction activity deals with transportation of raw materials to site. This therefore adversely affects all construction related activities. 7. Seasonal variations are inevitable and are beyond the realm of government control since there would be months during a financial periods which experiences hectic activity usually during festival seasons followed by moths of dullness. This can cause seasonal variations in economic cycles. However, how much of this dip would affect the general economy of a country depends on the policies followed by the government and the robustness of the industrial sector at that given point of time. (Blake et al, 2004) A dip in business activity for brief period is good because this leads to consolidation of the industry. A market essentially follows a system of demand and supply and goods are produced on the concept of a forecasted demand over the future years. Any reason which would hinder this forecast from becoming a possibility tends to put the market into recession. Hence this is the period during which the company can dispose of its stock and put things into perspective. Ways and methods would be discussed in increasing the efficiency of production during this period because it is during these trying times that one can assess the capability of one’s resources. Areas of improvements are observed and put into company policy. One this is put into the system, the work process improves for the better and the economic growth achieved after recession is higher than the original growth envisaged. (Verick Sher and Islam Iyanatul, 2010) The recession to particular country (say UK) can occur for a variety of reasons 1. An economic slowdown in country like the US with which there is an major trade partnership could start a recession 2. The banking system of the US and UK follows a practice which provides customer easy access to loans while at the same time not having a guarantee process by which the bank can raise the money from the customer in case of default. Customers failing to repay these loans could cause a severe pressure on the financial status of the bank itself. To raise the money for its security houses were disposed off at very low rates. This in turn caused a sharp fall in property prices resulting in a negative impact on the construction industry. A credit deficit in the banks stalls the lending capability of the bank thus creating further obstacles for the construction industry since all major construction projects require a large capital investment which needs to be provided by the bank. ( Verick Sher and Islam Iyanatul, 2010) 3. High prices of crude oil have a cascading effect on the price of all essential commodities. This drives up inflation. In such a scenario customer would limit the resources (money) they have in buying materials like food and clothing which are the bare essentials. Construction works are therefore put on hold and the industry suffers. 4. In order to counter a budget deficit, the government may decide to increase the taxes. The spending power of individual’s decreases thus impacting the construction sector. 5. When recession hits a particular region it is the construction industry that is first affected and the last to recover. This is because the growth of a country is dependent on the amount of money the government is ready to use for infrastructure development. Once recession hits, all these projects are put on hold till a solution is found out. This is an ideal case of ‘Opportunity lost’. Recovery of the economy would slowly bring back customer confidence, however the banks would tend to be more cautious next time lending. It would be a period of time after which banks start lending again for the execution of these construction projects. This causes the construction industry to recover last. ( Saunders Phillip and Gilliard June, n.d) Government Intervention There is a limit to which a company can hold on without government intervention, especially if the company is one which employs lot of people and affects the economic index of a country as a whole. Recession in a business growth is a vicious cycle during which loss of economic activity leads to lower production, leading to unemployment. ( Saunders Phillip and Gilliard June, n.d) The Government of UK during these trying times have come up with several schemes and initiatives. (Harari Daniel, 2009) These are 1. Construction Lean Improvement Programme (CLIP) This was initiated in 2003 to help construction companies and their suppliers identify areas where efficiencies in site and shop could be developed. This programme sought to lay emphasis on quality, managing cost and improve delivery mechanisms. 2. BERR, a non profit organisation was developed to offer information and guidance on most and efficient construction related techniques. 3. TRUSTMARK was a website that was developed to enable potential customers locates builders in the construction industry that were of good reputation. Since these firms needed to adhere to certain quality standards customers were confident in handing over their projects to these builders. Factors affecting the economics of construction industry Like all sectors of the market the construction industry is also run on the supply and demand principle. (( Saunders Phillip and Gilliard June, n.d) 1. Scarcity and choice- this concept defines the basis of economics. This is a condition that originates from a society having unlimited desires while having to settle with limited resources. Human resources include health, education and skill set of people. Land, wood, fish and oil are called natural resources. Buildings, equipment, roads, dams form part of the capital goods needed to improve production services.( Saunders Phillip and Gilliard June, n.d) 2. Opportunity Cost is a benefit that is traded off in selecting the next best alternative. This occurs when resources are scarce and the opportunity is given up for use in other purposes. Tradeoffs on the other hand involve accepting less of one particular entity to have more of another service. Society engaging in a tussle between having more of energy while at the same hampering the environment is an example of a trade-off. 3. Supply and Demand- Demand refers to the quantity of product or service that is desired by customers at a given point in time. Supply indicates the how much can the market offer to meet that demand. In market economics the relationship between demand and supply form the basis for allocation of resources. a. The Law of Demand states that when all factors are constant the higher the price of the commodity lesser is the demand. This increased cost increases the opportunity cost of buying that particular product. b. Law of Supply states that higher is the price at which a product is sold higher will be the quantity supplied. This is profitable for the producer because selling at a higher price would mean more revenue generation. ( Saunders Phillip and Gilliard June, n.d) Price Determination in the Construction Industry a. When the function of supply and demand is equal the economy is said to have attained equilibrium. This is located at a point on the graph at which supply and demand meet. This is a hypothetical situation and is difficult to achieve since price of goods and services are constantly changing with fluctuations in demand and supply. However the idea to attain a state that is somewhere close to this equilibrium which helps us in fixing the price of a particular commodity or service. b. Shifts in a demand curve occur when there is an increase in demand of a commodity without any change of price. An example could be increase in beer consumption without any decrease in price. The reason might be increase in environment temperatures causing more people to taking beers or another reason could be beer becoming the only available drink in that particular area. Shift in the Supply curve would occur when a decrease in available raw material or other factors would cause a decrease in production but would still force the vendor to retain the same selling price to maintain status quo. ( Saunders Phillip and Gilliard June, n.d) Allocation of resources There are three major economic decisions regarding resource allocation. Resources can be allocated based on tradition by following the footsteps of our previous generation or could be decided by a larger central authority. These are therefore called traditional resource allocation and command resource allocation. The third allocation is driven by market prices by which signals provided by a mix of consumers, workers, investors and business firms reflect in the supply and demand of a particular good or services. ( Saunders Phillip and Gilliard June, n.d) Bias in the construction Industry It has been found out that information collected from secondary sources can produce results that are invariably biased since this information might be old and outdated. Secondly the sample that has been selected to carry out the research into the construction related questionnaire might not be a very diverse one covering people of various nationalities and occupational origins. (Loosemore Martin & Tan Chin, 1999) Hence the answers received might be one sided. Thirdly the structure of the questionnaire might be such that it leads the person to provide answers that might not be diverse. This lack of broad sightedness in preparing questionnaires might create bias in sampling. Occupational bias is what affects the questionnaire most adversely. Conclusion The construction sector is very volatile sector with its demand being affected by policies followed by the government. Market factors like fuel prices and other political developments also affect the demand in the construction sector. However this is one sector of the market that needs to be handled with efficiency and professionalism since it directly affects the economic index of a country to a large extent. Reference Lists 1. Albanesi Stefania, 2010 “Business Cycles”, Columbia University 2. Best Aaron et al, 2007, “Measurement Beyond GDP”, International Conference, Brussels. 3. Blake et al,2004, “Competitiveness of the UK Construction Industry”, Construction Economics and Statistics. 4. Buerkin Claudia and Wallbaum Holger, 2003, “Concepts and instruments for a sustainable construction sector”, UNEP Industry and Environment. 5. Saunders Phillip and Gilliard June, n.d, “ A Framework for Teaching basic Economic Cocepts”, Economic America. 6. Verick Sher and Islam Iyanatul, 2010, “The Great Recession of 2008-2009: Cuases, Consequences and Policy Responses”, Institute for the Study of labour. 7. Harari Daniel, 2009, “Construction Industry”, Economic Policy and Statistics Section. 8. Loosemore Martin & Tan Chin, 1999, ‘Occupational bias in construction management’, Construction management and Economics Read More