Construction economics : a new approach

353 Pages·2013·12.089 MB·English

by  Danny Myers;

Construction Economics
Construction Economics provides students with the principles and concepts
underlying the relationship between economic theory and the construction industry.
The new approach adopts an argument that economics is central to government
initiatives concerning sustainable construction.
This edition has been revised to explain the effects of the current economic
crisis on the construction industry. In addition, sections relating to less developed
countries, the economics of sustainable development and theories relating to a firm’s
bid strategy have all been rewritten. With new data, examples, initiatives, readings,
glossary items and references, the third edition of this established core text builds on
the strengths of the previous edition:
• a clear and user-friendly style
• use of a second colour to highlight important definitions and formulae
• regular summaries of key points
• a glossary of key terms
• extensive use of tables and figures
• extracts from the academic journal Construction Management and
Economics to consolidate and prompt discussion
• reviews of useful websites.
This invaluable textbook is essential reading across a wide range of disciplines
from construction management and civil engineering to architecture, property and
surveying.
Danny Myers is a lecturer and researcher based in the Department of Construction
and Property at the University of the West of England, UK, and visiting lecturer at
the University of Bath, UK.
0000--PPrreelliimmss..iinndddd 11 1100--1111--22001122 1111::3355::5522
0000--PPrreelliimmss..iinndddd 22 1100--1111--22001122 1111::3355::5522
Construction Economics
A new approach
Third Edition
Danny Myers
0000--PPrreelliimmss..iinndddd 33 1100--1111--22001122 1111::3355::5522
First edition published 2004
Second edition published 2008
This edition published 2013
by Routledge
2 Park Square, Milton Park, Abingdon, Oxon, OX14 4RN
Simultaneously published in the USA and Canada
by Routledge
711 Third Avenue, New York, NY 10017
Routledge is an imprint of the Taylor & Francis Group, an informa business
© 2013 Danny Myers
The right of Danny Myers to be identified as author of this work has been asserted
by them in accordance with sections 77 and 78 of the Copyright, Designs and Patents
Act 1988.
All rights reserved No part of this book may be reprinted or reproduced or utilised in
any form or by any electronic, mechanical, or other means, now known or hereafter
invented, including photocopying and recording, or in any information storage or
retrieval system, without permission in writing from the publishers.
Trademark notice: Product or corporate names may be trademarks or registered
trademarks, and are used only for identification and explanation without intent to
infringe.
British Library Cataloguing in Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging-in-Publication Data
Myers, Danny.
Construction economics : a new approach / Danny Myers. — 3rd ed.
p. cm.
Includes bibliographical references and index.
1. Construction industry. 2. Construction industry—Management. I. Title.
HD9715.A2M94 2013
338.4’7624—dc23 2012037199
ISBN13: 978-0-415-52778-1 (hbk)
ISBN13: 978-0-415-52779-8 (pbk)
ISBN13: 978-0-203-38443-5 (ebk)
Typeset in Sabon by DSM Partnership
0000--PPrreelliimmss..iinndddd 44 1100--1111--22001122 1111::3355::5522
Contents
List of Tables and Figures vi
Acknowledgements ix
Chapter 1: An Introduction to the Basic Concepts 1
Reading 1 25
Part A Effective Use of Resources 29
Chapter 2: Economic Systems for Resource Allocation 31
Chapter 3: The Market Mechanism 45
Chapter 4: The Theory of Demand 57
Chapter 5: The Theory of Supply 71
Chapter 6: Clients and Contractors 85
Chapter 7: Costs of the Construction Firm 97
Chapter 8: Types of Market Structure in the
Construction Industry 123
Reading 2 137
Reading 3 140
Part B Protection and Enhancement of the Environment 143
Chapter 9: Markets for Green Buildings and Infrastructure 145
Chapter 10: Market Failure and Government Intervention 163
Chapter 11: Environmental Economics 179
Reading 4 197
Part C Economic Growth that Meets the Needs of Everyone 201
Chapter 12: Managing the Macroeconomy 203
Chapter 13: The Economy and Construction:
Measurement and Manipulation 217
Chapter 14: The Business Case: Inflation and Expectations 245
Reading 5 265
Chapter 15: Sustainable Construction 271
Reading 6 293
Glossary 297
References 319
Index 329
v
0000--PPrreelliimmss..iinndddd vv 1100--1111--22001122 1111::3355::5522
LIST OF TABLES AND FIGURES
Tables
1.1 The construction industry – broadly defined 1
1.2 Parties traditionally supplying a construction project 11
1.3 The construction industry – narrowly defined 19
1.4 Value of construction output in Great Britain 20
1.5 Sources of international data 21
1.6 A brief guide to official sources of UK statistics 22
1.7 Symbols used to annotate official statistics 23
3.1 Transaction costs which affect construction 48
4.1 Factors affecting demand for owner-occupied housing 59
4.2 Factors affecting demand for privately rented housing 60
4.3 Factors affecting demand for social housing 61
4.4 Factors affecting demand for industrial and
commercial buildings 61
4.5 Factors affecting demand for infrastructure and
public sector construction 62
4.6 Factors affecting demand for repair and maintenance 63
4.7 Factors affecting the demand for any product 64
5.1 The individual and market supply schedules for a
hypothetical three-firm industry 73
5.2 Construction industry supply in Great Britain, 2010 75
5.3 Changing market conditions 83
6.1 Contractors involved in construction 85
6.2 The benefits of partnering 91
7.1 Diminishing returns: a hypothetical case in construction 102
7.2 Typical construction costs 107
7.3 Marginal and average costs 110
7.4 Concentration ratios by industry 119
8.1 An example of bid rigging 133
9.1 The characteristics of green commercial buildings 147
9.2 Examples of green buildings in the UK 148
9.3 Five principles of sustainable housing 150
9.4 Examples of resource productivity 154
9.5 The benefits of modern methods of construction 155
9.6 Internal features to improve productivity 158
10.1 Government policies to address market failures 167
10.2 Market failure and government intervention 174
11.1 Statistical values of human life 190
11.2 Monetary value of global ecosystem services 191
vi
0000--PPrreelliimmss..iinndddd vvii 1100--1111--22001122 1111::3355::5522
11.3 Present values of a future pound (sterling) 195
12.1 UK macroeconomic statistics 204
12.2 Economy forecasts 2012 to 2016 214
12.3 Functions of the Construction Sector Unit 216
13.1 Macroeconomic statistics for selected economies 220
13.2 Measuring aggregate demand in 2010 market prices 229
13.3 The ecological footprint of selected economies 240
14.1 UK inflation rates 246
14.2 Summary of inflation indices 249
15.1 Three interpretations of sustainable development 273
15.2 What makes sustainable development different? 274
15.3 Countries following a sustainable construction agenda 277
15.4 Three interpretations of sustainable construction 279
15.5 Factors that contribute to sustainable construction 281
15.6 Government reports 1998 to 2011 286
Figures
1.1 The trade-off between military goods and civilian goods 4
1.2 Increasing output and the production possibility curve 6
1.3 A complex set of markets for one building project 12
1.4 The circular flow model: a two sector economy 15
1.5 A model for construction economics: a new approach 17
2.1 A spectrum of economic systems 31
2.2 The price mechanism at work 32
2.3 The general principles of a centrally planned economy 35
2.4 New construction output 1955–2010 38
2.5 The trade-off between equity, efficiency and the
environment 42
3.1 Product and factor allocation via the pricing mechanism 46
3.2 The axes of a supply and demand graph 49
3.3 A simple supply and demand diagram 50
3.4 The determination of equilibrium price 52
3.5 Changing market conditions lead to a new equilibrium price 54
4.1 A standard market demand curve 57
4.2 Change in a non-price determinant causing a shift in demand 67
4.3 Change in price causing a movement along a given demand
curve 68
5.1 The supply curve for an individual firm 72
5.2 A shift of the supply curve 78
5.3 Perfectly inelastic supply 81
5.4 Changing market conditions across three markets 84
6.1 Private finance initiative 90
vii
0000--PPrreelliimmss..iinndddd vviiii 1100--1111--22001122 1111::3355::5522
6.2 Project life cycle 95
7.1 Simplified view of economic and accounting profit 99
7.2a A production function 103
7.2b Diminishing marginal returns 105
7.3a Total costs of production 109
7.3b Average fixed costs, average variable costs, average total
costs and the marginal costs of production 109
7.4a Preferable plant size 113
7.4b Deriving the long-run average cost curve 114
7.5 Economies and diseconomies of scale 116
7.6 Economies of scale in the construction sector 117
8.1 The demand curve for an individual firm in a perfectly
competitive market 124
8.2 Finding a profit-maximising position 126
8.3 Long-run perfectly competitive equilibrium 128
9.1 Life cycle analysis of buildings and infrastructure 160
10.1 A spectrum of economic goods 171
10.2 Internalising external costs 174
11.1 The environment: beginning and end 179
11.2 The mass balance model 181
11.3 Empty world 183
11.4 Full world 184
11.5 The economic effect of a pollution tax 186
12.1 Government objectives and government policy 210
12.2 Business fluctuations 212
13.1 The circular flow of income, output and expenditure 219
13.2 The circular flow model with injections and leakages 225
13.3 The aggregate supply curve 231
13.4 Three ecological footprint scenarios, 1960 to 2100 242
14.1 Calculating a price index 247
14.2 Construction cost indices 250
14.3 The money market 255
14.4 Adaptive expectations theory 258
14.5 The wage-price spiral 259
14.6 UK house price inflation 261
14.7 A cobweb diagram showing how property prices can
fluctuate 262
15.1 Rostow’s stages of economic growth 272
15.2 The three strands of sustainability 275
15.3 A network of construction projects 283
15.4 The circle of blame 284
viii
0000--PPrreelliimmss..iinndddd vviiiiii 1100--1111--22001122 1111::3355::5522
ACKNOWLEDGEMENTS
Although the book cover implies this is all my own work, it was not
achieved alone. The staff and students that I have worked with have
subtly, and not so subtly, made their mark. In particular, research
undertaken with Kevin Burnside, a supportive colleague over a number
of years, has helped to improve the clarity of the process of bidding for
work in a construction industry dragged down by financial crisis and
subsequent recession. The fruits of our discussion should be evident in
Chapters 7 and 8.
Next, to bring life to a manuscript is no easy task and this would have
been impossible without the graphic design skills, and patience, of Chris
Wade, who has added some new artwork to this edition.
A major concern from the outset was to create a text that was easy to
read and use. This is some challenge in the subject area, and again it has
been a pleasure to be supported by the editing skills of Paul Stirner. His
perceptive, informed and detailed line of enquiry has added greater clarity
and rigour to the text, making the completed manuscript as accessible
as possible.
Finally I should acknowledge the support of the publishers,
in particular Brian Guerin who co-ordinates the team involved in
commissioning a new edition and taking it through to publication, and
you would be surprised at the number of departments that involves.
I hope you find the finished product interesting and relatively easy to
use. If any errors or omissions remain, I apologise for these in advance,
and would be grateful for correspondence bringing them to my attention.
Enjoy the book!
Danny Myers
September, 2012
ix
0000--PPrreelliimmss..iinndddd iixx 1100--1111--22001122 1111::3355::5522