1. Introduction to Economics & Economic Systems
Topic 1
Introduction to Economics & Economic Systems

2. Questions to consider:
What is Economics?
What do we mean by ‘economise’?
Who is affected by economics?
Why is economics important to property & construction?

3. Satisfaction of Individual Human ‘wants’
Q: How do people satisfy their material wants?

4. Satisfaction of collective Society ‘wants’
Q: How does Society satisfy its needs & wants?

5. Can people’s wants be satisfied in the long run?
Can we have everything we want? Why not?
Gmeee,
Gmeee

6. INSATIABLE WANTS + FINITE RESOURCES =
THE NEED TO ECONOMISE

7. ECONOMISE Best case scenario:
Maximise our satisfaction with our limited resouces,
i.e. choose how to use our resources to our greatest advantage
ECONOMISE

8. "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

9. 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 Goods & Services.
i.e., Factors of Production
3 types:

10. LAND – all natural resources
LABOR – human effort involved in production
CAPITAL – machinery/equipment for manufacturing other
Goods & Services - expenditure on capital is ‘capital investment’

11. Fourth Factor of Production – Enterprise

12. Labour Intensive
(lots of human work)
Capital Intensive
(lots of money and/or
Investment)
Q: Where does construction industry sit?
Q: How would you measure the wealth of an economy/society?

13. ‘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 enablestransactions to take place –
it can be exchanged for Goods & Services

14. Money
Money is a liquid asset (can easily be
converted into other assets)
The functions of money:
medium of exchange
unit of account (how rich are you?)
a store of wealth
The characteristics of money:
divisible
stable value
portability
durability

15. 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?

16. 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

17. In 1999-2000 construction accounted for 5.5% of GDP,
Construction is an important part of the economy
In construction accounted for 5.5% of GDP,
And employed almost 8% of the workforce

18. 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?

19. An easy example of Opportunity cost -
You are hungry. You have one dollar. You are at Wendys.
You can buy one item. You must forego al other items.
What one item would be your best choice to alleviate your hunger?

20. Another example,
A plot of land could have several possible uses:
develop shopping centre
develop office block
develop private housing estate

21. 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?

22. 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 (tons)
Houses (units) A 34 B 30 32 C 60 28 D 90 23 E
120 16 F
150 7 G
180

23. 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 opportunity
Cost of producing 30,000 more
tons of sugar? G x
180
Sugar (tons) F x
150 E x
120
A: We move from 16 houses to 8 produced. A cost of 8 housing units. D x 90 H C x x 60 B x 30 A x 5 10 15 20 25 30
Houses (units)

24. 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

25. A country must decided which economic system it will employ in
order to utilize 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

26. All economies face the ‘economic problem’
Thus, they must adopt an economic system in order to allocate their
resources
When allocating resources, the society must consider 3 questions:
What is to be produced?
How are the goods to be produced?
For whom to produce?
Society’s answers to these questions will determine which economic
system they adopt: Capitalist, Mixed or Socialist

27. CONSUMERS INDUSTRY A INDUSTRY B Free Enterprise Economic System
Land, labor,
Capital
Land, labor,
Capital
Land, labor,
Capital
Sales & Profit
Sales & Profit
Sales & Profit
Produce
Produce
Produce
CONSUMERS
Sales & Profit
Sales & Profit
Sales & Profit
Produce
Produce
Produce
Land, labor,
Capital
Land, labor,
Capital
Land, labor,
Capital
INDUSTRY B
Free Enterprise Economic System

28. Capitalist Economic System – Key Words
free enterprise system - private business operates with minimal
government involvement.
privately owned resources - the means and materials for production
the economy are owned and operated by private individuals
and businesses, not the government.
profit motive - individuals and businesses provide goods and
services in order to make money.
consumer sovereignty - the one buying the good or service is free
to make whatever choice seems most advantageous to them.

29. 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

30. 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. defense, 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

31. CONSUMERS INDUSTRY A (increased demand) INDUSTRY B (decreased demand)
Land, labor,
Capital
Land, labor,
Capital
Land, labor,
Capital
Land, labou,
Capital
Sales & Profit
Sales & Profit
Sales & Profit
Sales & Profit
Produce
Produce
Produce
Produce
CONSUMERS
Sales & Profit
Sales & Profit
Sales & Profit
Produce
Produce
Produce
Land, labor,
Capital
Land, labor,
Capital
Land, labor,
Capital
INDUSTRY B (decreased demand)
Free Enterprise Economic System

32. CONSUMERS GOVERNMENT GOVERNMENT Mixed Economic System MONETARY SYSTEM
LEGAL
SYSTEM
-monopoly reg’n
-pollution control
-building regs
Land, labor,
Capital
Land, labor,
Capital
Land, labor,
Capital
Sales & Profit
Sales & Profit
Sales & Profit
Produce
Produce
Produce
CONSUMERS
ECONOMIC
POLICY
-fiscal
-monetary
Sales & Profit
Sales & Profit
Sales & Profit
Produce
Produce
Produce
ESSENTIAL
GOODS &
SERVICES
Land, labor,
Capital
Land, labor,
Capital
Land, labor,
Capital
GOVERNMENT
TAXATION
Mixed Economic System

33. 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

34. Government (Central Planning Authority)
Owns, Plans & Allocates Resources, & Controls Production
INDUSTRY A
INDUSTRY B
INDUSTRY C
INDUSTRY D
Prices set by
Government
Produce according to Gvt’s target
Produce acc. to Gvt’s target
Produce acc. to Gvt’s target
Produce acc. to Gvt’s target
CONSUMERS

35. 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

36. distribution through market, but price not determined by market
amount an individual receives depends on the proportion of
wealth they receive (income level)
Central Planning Authority 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 Goods and Services
essential Goods and Services are provided free of charge

37. Economic Decision Making
Direct Costs:
land acquisition
building costs
planning permission fees
cost of labourers
maintenance costs
materials costs
Direct Returns:
extra production
extra sales
extra profit
Private Costs & Benefits

38. Economic Decision Making
Direct Costs:
land acquisition
building costs
planning permission fees
cost of labourers
maintenance costs
materials costs
Direct Returns:
extra production
extra sales
extra profit + +
Social Benefits:
increased employment
more income & wealth
Social Costs:
increased pollution
increased noise
increased traffic congestion
unsightly view
True Social Costs & Benefits

39. 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

40. Cost-Benefit Analysis – Disadvantages
Deciding which social costs & benefits to include in analysis
- social impacts?
- environmental impacts?
- international impacts?
Evaluation of social costs & benefits – the allocation of a
market price
- how do we put a value on these things?