Economics is the study of the production and consumption of goods and the transfer of wealth to produce and obtain those goods.

Economics explains how people interact within markets to get what they want or accomplish certain goals.

Since economics is a driving force of human interaction, studying it often reveals why people and governments behave in particular ways.

Basic Concepts of Economics in Construction Industry

economics

Types of Economics

There are two type of economic;

1.) Micro Economics

Microeconomics focuses on the actions of individuals and industries, like the dynamics between buyers and sellers, borrowers and lenders.

2.) Macro Economics

Macroeconomics, on the other hand, takes a much broader view by analyzing the economic activity of an entire country or the international marketplace.

Positive statements

These are objectives statements that can be tested or rejected by referring to the available evidence.

Example:- A rise in consumer incomes will lead to a rise in the demand for new cars.

More competition in markets can lead to lower prices for consumers

If the government raises tax on cars, this will lead to a fall in demand for cars.

Normative statements

These statements express opinions about what ought to be. They are subjective rather than objective.

Example:- Medical students should be given a proper solution by the government.

Ragging should be banned

Basic Concepts of Economics

Needs

➥ The basic or essential necessities an individual should have to live as a human.
➥ Tends to be limited
➥ Basic in nature

They are two types:

1. Physical needs (Material needs)

2. Psychological needs (emotional needs)

Main features of human needs

➚ Basic or primary and essential for living
➚ Common to every person and country
➚ Tend to be limited in nature
➚ Cannot be created

Wants

Different forms or ways selected by people to fulfill needs and increased the satisfaction received when fulfilling such needs.

Wants which can be fulfilled by consuming the goods and services manufactured through a production process of a country are known as Economic wants.

Main features of human wants

➛ Unlimited nature and complexity of wants
➛ Diversity of wants
➛ Change with time
➛ Could be created

Goods

Physical and tangible products that can be used to satisfy human needs and wants.

Main Features of goods

➥ Tangibility
➥ Non-perishable
➥ The ownership

Service

An activity or benefit or satisfaction provided from one party to another when receiving a service.

Main Features of Services

✌ Intangibility
✌ Perishability
✌ Inseparability
✌ Variability

Economic Goods

These are created as a result of a certain production process with the use of limited economic resources.
Since limited economic resources are used in the production process, opportunity cost is created.

Main features of economic goods

☝ Limited in supply
☝ Represents an individual ownership
☝ Will be transacted in a market place
☝ Represents an opportunity cost

Free goods

These are resources or goods on which no one at any given point of production or consumption has incurred a cost which are unlimited supply compared with human wants and available at zero prices.

Key features of free goods

➛ Plenty in supply
➛ No individual ownership
➛ Not transacted in a market place
➛ Opportunity cost will not be incurred

Consumption

The activity of fulfilling human needs and wants using goods and services
Purchasing either goods or services is considered as the economic activity of consumption.

Utility

The satisfaction generated or received by consuming a good or a service.
The ability to satisfy human needs and wants which is included within goods and services
Measured using utile.

The additional or marginal utility received by consuming and increasing number of the same product tends to decrease while the total utility or satisfaction shall decrease.

Types of Utility

There are five type.

Ⅰ. Form Utility

Utility which is obtained by changing the form of the product is called form utility. It is derived by converting the raw materials into finished products,

For example:- Cotton is converted into clothes such as shirts, pants, etc. These clothes thus have form utility.

Ⅱ. Time Utility

Changing the time of utilization creates time utility. It is derived by storing the commodity from the time of production/procurement to the time of consumption.

For example:- Blood donated is used at a later time in case of emergencies. Thus blood donation has time utility.

Ⅲ. Place Utility

Utility obtained by transporting goods from the place of abundance to the place of scarcity or from the place of production to the place of consumption creates place utility.

For example:-  “Malwane rambutan is transport to other districts”creates place utility.

Ⅳ. Service Utility

Utility created by providing services to people is called as service utility.

For example:-  Lawyers provide service utility to their clients, Bloggers provide service utility to their audience, etc.

Ⅴ. Marginal Utility

As an individual consumes more units of a commodity per unit of time the additional units adding to the total utility.

When consumption is increased in a unit the difference occurs in the total utility.

Intangible utilities

There have been considering thus far only the producers of tangible goods, that is, economic goods. We certainly cannot call lawyers, doctors, teachers, preachers, actors and artists producers unless we can show that their services are somehow helpful in the production of material goods.

From the economic point of view all these classes of men are producers of utility, for their services give positive satisfaction to the persons from whom they get their income.

Diminishing marginal utility

Although total utility increases as more of the commodity is consumed, the marginal utility derived from each additional unit decreases.

Producer

Human family as producers and consumers. All are consumers, for otherwise they would perish, and the vast majority of them are also producers, for by their daily labour they must earn their income.

Production Resources

The inputs which are used to produce goods and services in order to satisfy human needs and wants.

They are two types,

Ⅰ. Free resources
Ⅱ. Economic resources

Ⅰ. Free Resources (Noneconomic resources)
Resources which are of unlimited supply compared with human wants and available at zero prices.

Ⅱ. Economic resources
✌ Limited in supply
✌ Scarce compared to unlimited human wants
✌ Involve opportunity cost
✌ Commonly identified as factors of production, production resources or production factors

Factors of production

➥ Any inputs or items that are combined together in the process of producing goods and services.
➥ All production factors have a value or a cost
➥ Tend to be limited in supply
➥ Creation of opportunity cost

Scarcity

Limitedness of economic resources or resource endowment of a society compared with the unlimited human wants.

Central or basic economic problem faced by any economy
Since resources are limited compared with unlimited human wants the concept of scarcity is known as relative scarcity.

Key features of scarcity

✌ A relative concept
✌ Central economic problem
✌ Does not refer to poverty
✌ All societies face a problem of choice

Choice

Since economic resources are limited and represent alternative uses, a certain choice has to be made with regard to what needs or wants should be satisfied using limited economic resources.

Basic choices of a society

The basic economic problems or production decisions

* what goods to produce in what quantities
* how to produce
* whom to produce

Opportunity cost

The cost (benefit) of the next best alternative forgone or missed.

The cost or benefit missed in terms of the next best alternative on which resources could have been used for production or consumption.

Exchange

No exposition is necessary to make the reader understand the necessity for the exchange of economic goods. Nothing in business is more obvious than the fact that few people produce the goods which they consume.

Thus exchange has become the most conspicuous feature of our modern civilization. Nearly all producers expect to market their product.

Money

Not until money appeared was it possible for men to specialize in their labor and to begin the development of an exchange civilization, each man devoting himself to the task which gave him the greatest pleasure or in which he was most proficient.

Money is the medium which made this advance possible. It is a thing wanted not for itself but because with it one can buy what one wants.

Credit

Credit is the trust which allows one party to provide resources to another party where that second party does not reimburse the first party immediately (thereby generating a debt), but instead arranges either to repay or return those resources (or other materials of equal value) at a later date.

The resources provided may be financial (e.g. granting a loan), or they may consist of goods or services. (e.g. consumer credit).

Credit encompasses any form of deferred payment. Credit is extended by a creditor, also known as a lender, to a debtor, also known as a borrower.

Types of credit

☝ Bank credit
☝ Trade credit
☝ Consumer credit
☝ Investment credit

Price

In ordinary usage, price is the quantity of payment or compensation given by one party to another in return for goods or services.

In modern economics, prices are generally expressed in units of some form of currency.

Price sometimes refers to the quantity of payment requested by a seller of goods or services, rather than the eventual payment amount.

This requested amount is often called the asking price or selling price, while the actual payment may be called the transaction price or traded price.

Value

Economic value is a measure of the benefit provided by a good or service to an economic agent.
Note that economic value is not the same as market price, nor is economic value the same thing as market value. If a consumer is willing to buy a good, it implies that the customer places a higher value on the good than the market price.
The difference between the value to the consumer and the market price is called "consumer surplus". It is easy to see situations where the actual value is considerably larger than the market price: purchase of drinking water is one example.

Value is linked to price through the mechanism of exchange. When an economist observes an exchange, two important value functions are revealed: those of the buyer and seller. Just as the buyer reveals what he is willing to pay for a certain amount of a good, so too does the seller reveal what it costs him to give up the good.

Welfare

Welfare economics is a branch of economics that uses microeconomics techniques to evaluate welfare at the aggregate (economy-wide) level. A typical methodology begins with the derivation (or assumption) of a social welfare, which can then be used to rank economically feasible allocations of resources in terms of the social welfare they entail. Such functions typically include measures of economic efficiency and equity, though more recent attempts to quantify social welfare have included a broader range of measures including economic freedom.

Production possibility of an economy

The production level that can be achieved with full employment and full production using resources available in society is called production possibility.

This is known as potential output level

To achieve the potential output level, an economy should achieve two main objectives;

o full employment
o full production

If u like this article then please comment us and share this article.

Read more article >>>

Procurement Method in Construction

General Rules of Abstracting and Taking off Quantities

Contractor All Risk Insurance (CAR Policy)

Alternative Dispute Resolution and Dispute Resolution in Construction

Methods of Bill of Quantities