Construction & Property Economics Lesson 4 – Demand and Supply on Construction Industry

Aim of this lecture The determinants of demand and supply on construction industry Various market structures Construction market structure The relationship between output, revenue and price Price elasticity

Question Clients Contractors Sub-contractors fragmentation Who creates demand for the construction process? Who liaise with the client to supply the product? Who supply the product? What is the term given to the theory in our industry which leads to weaknesses such as lack of collaboration, trust, training, etc? Clients Contractors Sub-contractors fragmentation

Construction Industry Determinants Demand Determinants Government Policies Economic Conditions Construction Price Inflation Population Growth/Urbanization Foreign investment Supply Determinants Resource Procurement Project Delivery Process Role of contracting firms Technological Application Usage of material

Supply and Demand Curve on Construction Industry

What are current demand determinants in the Singapore Property Market What are current demand determinants in the Singapore Property Market ? Can you see the correlation between construction industry and the property market ?

Different Market Structures

Perfectly competitive firm “one is such that a small part of the total industry in which it operates that it cannot significantly affect the price of the product in question

Single-Firm Demand Curve Perfect elasticity – the firm can sell as much output as it wants, providing it does not alter the price. If the firm were to raise its price, consumers will buy the same skill, product or service from another producer – price taker, it takes price as given

Characteristics of Perfect Competition Homogenous product Entry and exit without serious impediments Large number of buyers and sellers Complete information To both sellers and buyers Market prices Product quality Cost conditions

Which Market model best fits the construction and property market ?

Market Structures That Typify That The Construction Industry So far only highlighted a hypothetical market structure, now let’s analyse actual markets in our industry Construction market is generally competitive: Many firms producing an insignificant total output of construction No formal restrictions preventing firms from participating Most however do have some control over price

Defining – Output / Revenue / Price DEFINITION OUTPUT - is the amount of goods and services produced by a person, machine, firm, industry, or country etc. during a specific time period, such as a year REVENUE - is income that a company receives from its normal business activities, usually from the sale of good and services to customers PRICE - is the quantity of payment or compensation given by one party to another in return for goods or services

What is the relationship between price and revenue? In economics, the total revenue test is a means for determining whether demand is elastic or inelastic. If an increase in price causes an increase in total revenue, then demand can be said to be inelastic, since the increase in price does not have a large impact on quantity demanded.

Definition of Elasticity in economics Price elasticity of demand is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price when nothing but the price changes. If a small change in price is accompanied by a large change in quantity demanded, the product is said to be elastic (or responsive to price changes). On the other hand, a product is deemed inelastic if a large change in price is accompanied by a small amount of change in quantity demanded

Determinants of Demand Elasticity Share of consumer’s budget spent on the good Increasing in price reduce the demand because people are not both willing and able to purchase at higher price Availability of substitutes The greater the availability of substitute for a good, the greater the good’s elasticity of demand A matter of time The longer the adjustment period, the greater the consumer’s ability to substitute Some elasticity estimates The elasticity of demand is greater in the long run because consumers have more time to adjust

Determinants of Supply Elasticity Price Elastic of Supply Elastic Supply – Quantity supplied responds substantially to changes in price Inelastic Supply – Quantity supplied responds only slightly to changes in the price Determinant of price elasticity of supply Time period – supply is more elastic in the long run