Topic 1

Introduction to Economics & Economic Systems

Questions to consider:

• What is Economics?

• What do we mean by ‘economise’?

• Who is affected by economics?

• Why is economics important to property & construction?

 Satisfaction of Individual Human ‘wants’

Q: How do people satisfy their material wants?

 Satisfaction of collective Society ‘wants’

Q: How does Society satisfy its needs & wants?

• Can people’s wants be satisfied in the long run?

• Can we have everything we want? Why not?

Gmeee,
Gmeee,
Gmeee
INSATIABLE WANTS + FINITE RESOURCES =

THE NEED TO ECONOMISE

Best case scenario:

Maximise our satisfaction with our limited resouces,

i.e. choose how to use our resources to our greatest advantage

ECONOMISE
 "Economic problems arise as the individual or the
community has to make the most efficient use of its limited
resources and is confronted with the problem of choice.
Economics is accordingly concerned with the arrangements
that are made for the use of scarce resources"

L Ruddock, 1992
2.0 Resources

Specific known amount of resources available to each person/economy

Resources are anything which can be used to satisfy wants by producing

G&S.

i.e., Factors of Production

3 types:
1. LAND – all natural resources

2. LABOUR – human effort involved in production

3. CAPITAL – machinery/equipment for manufacturing other G&S’s

- expenditure on capital is ‘capital investment’
Fourth FoP – Enterprise
Labour Intensive Capital Intensive

Q: Where does construction industry sit?

Q: How would you measure the wealth of an economy/society?

‘Real Economy’ versus ‘Money Economy’

Q: Would the wealth & standard of living of the country increase

if the Government printed more money?

The real economy is concerned with the amount of Goods &

Services available to the population - E.g., shopping centres,
public transport, quantity of food, number of hospital beds etc..

Whereas, money has no intrinsic value – it merely enables

transactions to take place – it can be exchanged for G&S’s
Money

• money is a liquid asset (can easily be

converted into other assets)

• The functions of money:

 medium of exchange
 unit of account
 a store of wealth

• The characteristics of money:

divisible
stable value
Portability
durability
A measure of the wealth of an economy:

Amount of G&S produced

(National Production)

Amount of Income received

(National Income)

Amount of Expenditure on G&S

(National Expenditure)

Q: How can we achieve true economic growth in the economy?

Answer:

We compare ‘National Production’ on a year by year basis.

However, when comparing we must take into account inflation.

Therefore, economists use constant prices when comparing

National production figures, i.e.

The prices of one ‘base’ year are applied to the output of other
years
Construction is an important part of the economy

In 1999-2000 construction accounted for 5.5% of GDP,

And employed almost 8% of the workforce

3.0 Opportunity Cost

Economic Goods are scarce and, therefore, have a cost

In contrast to ‘free’ goods

The cost of using an economic good is the cost of foregoing the

next best alternative to which that resource could have been put

It is a way of putting a cost on our economic decisions

Opportunity cost = true economic cost

Q: Why is it referred to as a cost?

For example,

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?
4.0 Production Possibility Curves

An economic tool/diagram with two purposes:

• illustrates opportunity cost

• shows whether resources are being used efficiently

For example, suppose an economy produces two goods:

Alternative Sugar (000 tonnes) Houses (000 units)

A 0 34

B 30 32

C 60 28

D 90 23

E 120 16

F 150 7

G 180 0
Resources & technology fixed in short term

The combinations of production possibilities may be plotted on a curve,

as follows
Q: If the economy is at point E,
then what is the opp. Cost of
180 x
G producing 30,000 more tonnes of
Sugar (000 tonnes)

F sugar?
150 x
E
120 x
D
90 x
H C
60
x x
B
30 x
A
x
5 10 15 20 25 30

Houses (000 units)

Q: What does it imply if the economy was producing at Point H?

Consider what would happen if:

• There was an advance in construction technology, which

enabled houses to be produced more efficiently

• the total amount of resources in the economy increased

A country must decided which economic system it will employ in
order to utilise its finite resources.

The functions of an economic system:

• choose which goods & services will be produced

• ensure, as far as possible, that wastage of resources does not occur

• to push out the production possibility curve

All economies face the ‘economic problem’

Thus, they must adopt an economic system in order to allocate their

esources

When allocating resources, the society must consider 3 questions:

1. What is to be produced?

2. How are the goods to be produced?

3. For whom to produce?

Society’s answers to these questions will determine which economic

ystem they adopt: Capitalist, Mixed or Socialist
 INDUSTRY A

Land, labour, Land, labour, Land, labour,

Capital Capital Capital

Sales & Profit

Sales & Profit

Sales & Profit

Produce

Produce

Produce
CONSUMERS
Sales & Profit

Sales & Profit

Sales & Profit

Produce

Produce
Produce

Land, labour, Land, labour, Land, labour,

Capital Capital Capital

INDUSTRY B
Free Enterprise Economic System
Capitalist Economic System – Key Words

• free enterprise system

• price mechanism

• privately owned resources

• profit motive

• consumer sovereignty
Advantages of Capitalist System

• encourages most efficient methods of production by private

businesses (profit motive)]

• encourages innovation in production techniques

• allows economic freedom

• ensures scarce resources are used carefully

Disadvantages of Capitalist System

• inequality in distribution of goods & services

• some essential goods & services (those consumed on collective basis)

will not be provided by private sector, e.g. defence, police etc.

• monopoly situations can arise, which may lead to unfair practices

• fluctuating demand is characteristic, which leads to periods of high

unemployment and high inflation
 INDUSTRY A (increased demand)

Land, labour, Land, labour, Land, labour, Land, labour,

Capital Capital Capital Capital

Sales & Profit

Sales & Profit

Sales & Profit

Sales & Profit

Produce
Produce

Produce

Produce
CONSUMERS
Sales & Profit

Sales & Profit

Sales & Profit

Produce

Produce
Produce

Land, labour, Land, labour, Land, labour,

Capital Capital Capital

INDUSTRY B (decreased demand)

Free Enterprise Economic System
MONETARY
SYSTEM
GOVERNMENT
LEGAL
SYSTEM
Land, labour, Land, labour, Land, labour, -monopoly reg’n
Capital Capital Capital -pollution control
-building regs

Sales & Profit

Sales & Profit

Sales & Profit

Produce

Produce

Produce
ECONOMIC
POLICY CONSUMERS
Sales & Profit

Sales & Profit

Sales & Profit

-fiscal
-monetary
Produce

Produce
Produce

ESSENTIAL
GOODS &
Land, labour, Land, labour, Land, labour,
SERVICES
Capital Capital Capital

TAXATION GOVERNMENT
Mixed Economic System
Mixed Economic System – Key Words

• Government intervention

• Government role supports/facilitates free market enterprise in

following ways:

 establishing monetary system & legal system

 controlling monopolies
 provision of essential goods & services not provided
 regulating undesirable business practices
 alleviate inequality in society (progressive tax, social welfare)
 attempting to provide stable economy
 Government (Central Planning Authority)

Owns, Plans & Allocates Resources, & Controls Production

INDUSTRY A INDUSTRY B INDUSTRY C INDUSTRY D

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CONSUMERS
Socialist Economic System – Key Words

• Central Planning Authority (CPA)

• command system

• central planning and ownership of resources

• production targets (5 year plans) to plan resource allocation

• production techniques/income levels decided by CPA

• no consumer sovereignty (although consumers can choose)

• no profit motive as businesses are socially owned

• workers encouraged by incentives & patriotic loyalty

• distribution through market, but price not determined by market

• amount an individual receives depends on the proportion of

wealth they receive (income level)

• CPA set wage levels for different jobs/professions according to

perceived value

• inequality does result, but not to extent of Capitalist system

• central authority price fixing, rationing of scarce G&S

• essential G&S are provided free of charge

Economic Decision Making

Direct Costs: Direct Returns:

• land acquisition • extra production
• building costs • extra sales
• planning permission fees • extra profit
• cost of labourers
• maintenance costs
• materials costs

Private Costs & Benefits

 Economic Decision Making

Direct Costs:
• land acquisition
• building costs
• planning permission fees
• cost of labourers
• maintenance costs
• materials costs
+ Social Benfits:
Social Costs:
• increased pollution
• increased noise
• increased traffic congestion
• unsightly view
Direct Returns:
• extra production
• extra sales
• extra profit
+
• increased employment
•More income & wealth
True Social Costs & Benefits
Cost-Benefit Analysis

Stage 1
The listing of all the relevant costs and benefits attributable to the
project

Stage 2
All cost and benefits are then evaluated so that they can be expressed
as a common monetary value

Stage 3
All cost and benefits are discounted back to the present.

Stage 4
Project appraisal. Finally, the decision-maker needs to assess all the
costs and benefits, and select a project that yields the best increase in
'social welfare', or net social benefit
Cost-Benefit Analysis – Disadvantages

1. Deciding which social costs & benefits to include in analysis

2. Evaluation of social costs & benefits – the allocation of a

market price