DBN 352

Construction economics
MICROECONOMICS
Definition of economy
 Economics is a study how people use
their limited resources to satisfy their
unlimited needs and desire.
Definition of economy
 It is a study about scarcity, choices and
opportunity cost.
Definition of
Microeconomics
 The study of individual economic units in
detail such as household, a firm and
government.
 Word ‘Micro’ means looking closer to
small units, providing an outline for
choices and decision making of an
individual, a business and the public
at large.
Definition of Microeconomics
(Cont’d)
 Example:
 Daily lives – What do I want for breakfast?
 Firms – How many labourers should we
employ?
 Government – Shall we allocate budget for
schools or clinics?
Basic economic
concepts
Scarcity
- The condition in which resources available are not
enough to meet all wants (labour, Capital, Land&
Entrepreneur)
-Wants always exceed limited resources to satisfy society

Choice
- Decisions to choose from many alternatives that you have
- Comparison of alternatives (compare the costs and
benefits for each alternative)

Opportunity Cost
- It can define as the second best alternative that has to
forgo for another choice which give more satisfaction
Basic economic
problems
 What to produce?

 How to produce?

 For whom to produce?

Demand
 Definition of demand – the ability and
willingness to buy specific quantities of
goods in a given period of time at a
particular price.

 Law of demand – The higher the price of a

product, the lower quantity demanded of that
product and vice versa.
Demand (Cont’d)
But….
Assumptions:
 Tastes and preferences of consumers remain
unchanged
 Consumers income remains the same
 Price of related goods (complement or
substitutes) should remain unchanged
 Goods should not have any prestige value
Determinants of
demand
 Internal factors
 Price of goods
 Service policies and terms of payment
 Profit margin

 External factor
 Price of related goods
 Complementary goods
 Consumer income
 Tastes and fashions
 Population or number of buyers
 Expectation about future prices
 Advertisements
 Festive seasons and climate
 Level of taxation
 Supply of money in circulation
Determinants of demand
(Cont’d)
Internal Factors

 Price of goods
 Depends on the cost of production
 Higher the price, lower the demand

 Service policies and terms of payment

 Better customer service and terms of payment by credit
instead of cash will increase sales

 Profit margin
 A higher profit margin will lead to an increase in the price of
the product and reduce its demand, vice versa
Determinants of demand
(Cont’d)
External Factors
 Price of related goods
 Affected by a change in the price related to goods.
 2 categories of related goods:
 Substitute goods
 Complementary goods
 Consumer’s income
 When income increase, demand will increase
 Good increase in demand when income increase – normal goods
 Goods decrease in demand when income increase – inferior goods
 Tastes and fashions
 When a product become more fashionable, demand will increase
significantly
Determinants of demand
(Cont’d)
External Factors

 Population of no. of buyers

 Larger population with high rate of growth creates a greater
demand

 Expectation about future prices

 The higher the expected future price, the higher current
demand for the product

 Advertisements
 Advertised goods normally have a higher demand because of
the awareness
Determinants of demand
(Cont’d)
External Factors

 Festive season and climate

 I.e. during CNY, demand for oranges will increase.

 Level of taxation
 Higher the taxes, the lower the purchasing power of
consumers.
Change in quantity demanded
vs change in demand

Change in quantity  Movement along the

demand curve
demanded
 Occurs when price of
Price product changes

 Other factors constant

a
30

20 b  Upward movement
10 c -decrease in quantity
demanded (contraction)
Quantity
5 10 15
 Downward movement
-increase in quantity
demanded (expansion)
Change in quantity demanded
vs change in demand (cont’d)
 Shift in demand curve
Change in demand  Occurs when there are changes in
other factors such as population,
income, price of related goods, etc
Price
 Demand curve shifts to right if
 Price of substitute goods increases
 Price of compliment goods decrease
30  Income increases (normal goods)
b c
20  Expected future price increases
10  Number of buyers increase
 Demand curve shifts to left if
 Price of substitute goods decrease
Do D1
Quantity  Price of compliment goods increases
5 10 15
 Income decreases (normal goods)
 Expected future price decreases
 Number of buyers decrease
Supply
 Supply is defined as the ability and willingness
to sell or produce a particular product and
service in a given period of time at
particular price.
Supply (Cont’d)
 Law of supply - The higher the price of a product,
the greater is the quantity supplied of the product and
vice versa.

 Law of supply – P Qss (Positive relationship exists

between the price and the quantity supplied.

 Assumptions:
 Cost of production remains constant
 Number of sellers remain the same
 Price of related goods (complements and substitutes) do not
change
 Availability of other inputs remain unchanged
Determinants of supply
 Price of related goods

 Cost of production

 Expected future price

 Technology advancement

 Number of sellers

 Government policies

 Improvement in infrastructure
Determinants of supply
 Price of related goods
 Affected by a change in the price related to goods.
 2 categories of related goods:
 Substitute goods
 Complementary goods

 Cost of production
 When the cost f production increases, the quantity supplied will
decrease and vice versa

 Expected future price

 The higher the expected future price of product, the smaller the
current supply of the product and vice versa.

 Technology advancement
 New technologies that enable producers to use fewer factors of
production will lower the cost of production and increase supply
Determinants of supply
 Number of sellers
 The larger the number of firms supplying a product, the larger the
quantity supplied of the product and vice versa

 Government policies
 Taxes
 Subsidies

 Improvement in infrastructure
 Improvement of transportation and communication will facilitate
free and fast movement of goods and services
Change in quantity supplied
vs change in supply
 Movement along the supply curve
 Change in
quantity supplied  Occurs when price of product
changes

Pric  Other factors remain constant

e

 Upward movement-price of product

rises, the quantity supplied increases
3

0 a
2  Downward movement-price of a
0
1
b product falls, the quantity supplied
c
decreases
0 Quantity
5 1 1

0 5
Change in quantity supplied
vs change in supply (Cont’d)
 Shift in supply curve
 Occurs when there are changes in other
 Change in supply factors such as technology, government
policies, price of related goods, etc
 Price of a product remains constant
S3
Price S1
 Supply curve shift to right if
S2
 Price of substitute goods decrease
 Price of complementary goods
30 increases
20
b c  Price of input decreases
 Increase in number of sellers
10
 Government provides subsidy to
sellers
Quantit
5 10 15 y  Supply curve shift to left if
 Price of substitute goods increases
 Price of complementary goods
decreases
 Price of input increases
 Decrease in number of sellers
 Government imposes tax to sellers
Market equilibrium
 Definition - A market equilibrium is a situation
when quantity demanded and quantity supplied
are equal and there is no tendency for price or
quantity to change.
Market equilibrium…
cont’d..
Market equilibrium
(Cont’d)
Market Relationship Market price
condition between QD
and QS
Equilibrium QD = QS Equilibrium
Shortage QD > QS Rise
Surplus QD < QS Fall

 Shortage - the difference between the quantity

demanded and the quantity supplied in a market where
the quantity demanded is greater than the quantity
supplied

 Surplus – the difference between the quantity

demanded and quantity supplied in a market where the
quantity supplied is greater than the quantity demanded
Market equilibrium
(Cont’d)
 The market equilibrium will change when there
is a shift in the demand or supply curve.
 3 situations:
 The demand curve shifts and supply remains
constant
 The supply curve shifts and demand remain
constant
 Both demand and supply curve shift
simultaneously.
Effect of changes in demand
Price Price

SS SS

4
Surplus E0
E0
3 4
Shortage
3
D1

D0
D0 D2
Quantity
Quantity
6 8
6 8
Increase in Decrease in
demand demand
Effect of changes
supply
Price Price

S2

S0 S0
4
E0 Surplus E0
S1
3 3
Shortag
2 e

DD
DD

Quantit Quantit
6 8 y 4 6 y

Decrease in
Increase in supply
supply
Government intervention
in the market
 Maximum price and minimum price
 Ceiling price (Maximum price)
 Floor price (Minimum price)
Floor prices
Price are not allowed to fall
Also known as minimum price
Surplus occurs
E.g: labour rate, fertilizer
Advantages
Protects producer’s income
Higher wage rate
Disadvantages
Consumers pay more
Waste of resources of production
Creates unemployment
Ceiling price
Price is not allowed to rise
Also known as maximum price
Shortage occurs
E.g: house rental
Advantages
Consumer purchases products at a
lower price when ceiling price is set
below market rate.
Disadvantages
Emergence of black market
Reduces quantity produced
Producers tend to receive illegal
payments from consumers
Government intervention
in the market (Cont’d)
 Taxes and Subsidies
 When the government imposes a tax on the sale of goods, the price
of the goods might rise by the same amount of tax imposed.

 The increase in the price of goods whether in full, or in part or none

all depends on the burden tax falls on the buyer or seller.

 Indirect tax is a tax that is imposed by the government on producers

or sellers but paid by or passed on to the end-users. Indirect tax
consists of import duties, excise duties, service tax and export
duties.

 A subsidy is an incentive from the government to encourage

producers or sellers to produce more. Subsidy will lower the cost of
production.

 Subsidies by the Malaysian government are fertilizers, petrol,

diesels, etc
Thank You