A review of three economic concepts to clarify the meaning of construction economics
Comprehensively review three economic concepts to clarify the meaning of construction economics
Construction economics refers to the body of scholarship that is concerned with the methodology by which the factors involved in the construction process are optimized (Finkel, 1997: 3). The aim is to gain the most benefit from the lowest cost, while not needing to compromise on the safety, luxury and other benefits of the results of the construction process (Ruddock, 2008). Put simply, it is the science of how to achieve the best quality at the lowest price for the highest potential profit.
Factors of production are the resources that are utilized in order to produce the goods and services that constitute the economic product (Fujita et al., 2001: 291). In construction, there are multiple factors of production, each involving their own cost. With some factors, the cost is linked to the time it takes, so that the longer it takes to construct a building, the cheaper it will be up to a point; but in construction there are also elements that are limited facts, such as the time concrete takes to dry. The factors of production lie at the intersection between supply and demand (Ruddock, 2008). A construction firm's profit margin is the money that is left over once all the factors of production are taken into account (Myers, 2004: 34). Therefore, in areas of high demand (such as a desirable location in a city), the profit available in construction is very high, given that factors of production can remain largely constant between one area and a less desirable area only a few miles away with the same factor restraints. In order to distinguish between the factors that remain constant and the factors that increase, construction economics often separates the factors that remain constant as 'primary' inputs, such as the labour and capital inputs required (Fujita et al., 2001 293), with the building materials required which can vary as to the type and expense required by the market. Factors of production in construction economics are therefore those factors which vary according to the type of construction incurred. Primary factors are independent of the specific project and are affected by more general market factors; in other words they are those factors on which the construction firm has little or no choice, whereas factors of production are those which can be optimized according to the anticipated profit (Fujita et al, 2001: 295).
The competitive market at its most basic concept can be understood as the price consumers are willing to pay for a product (Hillebrant, 1985: 3). The price is affected by the intersection between supply and demand: the more a consumer wishes to pay for a product, or the rarer the product is on the market, the higher the price of the product will be. Conversely, the more products available, or the less a consumer actually wants a product, the lower the price will be. This situation is true in a perfectly competitive market, and results in the ultimate optimization of resources, where supply will meet demand. A firm that would operate in such a market cannot affect the price of the product as the perfect competitor needs to accept the given price of the product. However, no firm actually works in such a market (Myers, 2001: 115). A distinction needs to be made between the short-run profits and long-term profits: some firms may sell their product well above the minimum average cost of the product, which will then entice more firms into the sector, resulting in the depression of the price. This leads to long term price cycles as a feature of the production industry (Finkel, 1997: 16). If the sector held perfect information, all firms would be with the same advantage and disadvantage. Firms therefore hold their greatest competitive advantage by exploiting the fact that the market does not function with perfect information, and this leads to the competitive market.
The private sector is the section of the economy that is run purely for private profit, and is not under control by the state (Hillebrandt, 1985). As a result, with the exception of legal regulations that may be designed to hinder monopolization or exploitation, there are few limitations on the scale of profit that can be obtained from the private sector (Ruddock, 2008). Private sector contracts in the construction industry are generally the most lucrative. However, the higher the anticipated profit, the greater the risks: the market for property can be subject to significant fluctuations in supply and demand (Finkel, 1997. Construction economics allows the potential risks to be assessed and optimized. The public sector refers to the part of the economy that is paid for, either directly or indirectly by the government. If profits are made, they are re-invested into the service or good. Save for government bankruptcy, this then represents a much safer sector for construction as the payment is guaranteed regardless of what happens in the market. However, the profit margins are not as high owing to the lower risk, and firms are more often invited to bid for projects, meaning the profit available is limited.
Construction economics deals with aspects of the wider science of economics that sometimes behave in a specific way governed by the vagaries of the subject that is not always fully explained by the traditional models (Ruddock, 2008). The construction industry operates under particular constraints, it is a very slow moving industry, whereas the market in which it operates can be subject to extremely fast moving levels of boom and bust (Fujita et al., 2001: 114). This means it tends to exhibit a high risk aversion, particularly in the private sector which is why the long term economic health of a city or nation can be broadly mirrored by the health of the construction industry. Certain economists have great relevance for the construction industry, with Keynsian economics playing a particular role given the importance of construction projects as a vector for state investment in an economy (Finkel, 1997:31). Like economics in general, there is no simple model in construction economics, and given the nature of the industry, a firm grasp of the fundamentals and the wider theories is essential for increasing the competitive advantage of a firm.
Finkel, G. 1997. The Economics of the Construction Industry, London: ME Sharpe.
Fujita, M., Kurgman, P.R. and Venables, A.J., 2001. The Spatial Economy: Cities, regions and international trade. Cambridge (MA): MIT Press.
Hillebrandt, P. M., 1985. Economic Theory and the Construction Industry, Berkeley: University of California Press.
Myers, D., 2004. Construction Economics: A New Approach, London: Taylor and Francis.
Ruddock, L. 2008. Economics for the Modern Built Environment, London: Taylor and Francis.