DBG362

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 product
Price changes

a
▪ Other factors constant
30

20 b
▪ Upward movement -decrease
10 c in quantity demanded
(contraction)

▪ Downward movement -
Quantity
5 10 15
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
▪ Income increases (normal goods)
▪
30
Expected future price increases
▪
b c
20 Number of buyers increase
10 ▪ Demand curve shifts to left if
▪ Price of substitute goods decrease
▪ Price of compliment goods increases
▪
Do D1
Quantity Income decreases (normal goods)
5 10 15 ▪ 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

▪ Other factors remain constant

Price

▪ Upward movement-price of product rises, the

quantity supplied increases
30

a
▪ Downward movement-price of a product falls,
20 the quantity supplied decreases
b
10
c
Quantity
5 10 15
Change in quantity supplied vs
change in supply (Cont’d)
▪ Shift in supply curve

▪ Change in supply
▪ Occurs when there are changes in other factors such as
technology, government policies, price of related
goods, etc
▪ Price of a product remains constant
S3
Price
▪ Supply curve shift to right if
S1

▪ Price of substitute goods decrease

S2

▪ Price of complementary goods increases

30 ▪ Price of input decreases
20
b c ▪ Increase in number of sellers
10 ▪ Government provides subsidy to sellers

▪ Supply curve shift to left if

Quantity ▪ Price of substitute goods increases
5 10 15 ▪ 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 condition Relationship Market price
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 demand Decrease in demand
Effect of changes supply
Price Price

S2

S0 S0
4
E0 Surplus E0
S1
3 3
Shortage
2

DD DD

Quantity Quantity
6 8 4 6

Decrease in supply
Increase in 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