Construction Microeconomics

Unique and comprehensive reference describing microeconomic approaches, theories, and models adapted to and developed for the construction industry

Construction Microeconomics provides comprehensive coverage of microeconomics applied to the construction industry, focusing on construction clients, who initiate construction projects, and on contractors who transform the ideas and plans of clients into infrastructure and buildings. With the help of microeconomic theory, it tries to answer questions about decision-making by clients, contractors, and governments with respect to projects in the built environment. It includes discussions of alternative theories to mainstream microeconomics, such as new institutional economics, behavioral economics, and the capability approach. Applications from the construction sector including land supply, sustainability, industrialization, and lean construction are provided to ground the theory in practical construction.

In Construction Microeconomics, readers will learn:

• How microeconomic theory relies heavily on assumptions for modeling and the nuances of adjusting those assumptions
• How heterogenous contract goods affect supply and demand, markets, information, technology, and accordingly, the theories of contractors and owners
• How interaction influences the production process and how land as a production factor changes the production function
• How ex-ante costs determine the cost theory of the contractor and why contracting is more akin to the service sector than the goods sector

Advanced undergraduate and masters students, lecturers and academics in ­construction and related disciplines, and professionals in the construction industry looking for expert analysis into a unique facet of the field will find Construction Microeconomics to be a valuable, complete, and authoritative reference on the subject.

Christian Brockmann is Professor of Construction Engineering, Management and Economics at the City University of Applied Sciences, Bremen, in Germany. With over 20 years’ experience in the management of major infrastructure projects as a contractor and consultant, Christian was Project Director for the BangNa Expressway in Thailand and the Port Said Tunnels in Egypt, (both $2b+ projects), and was part of the Owner’s Project Management Team for the Qatar Integrated Railway Project (a $40b+ project).

Foreword by Gerard de Valence

Preface

Introduction 1.1

1.1.         Navigating the Maze of Economic Literature

1.1.1.     Economics

1.1.2.     Microeconomics

1.1.3.     Macroeconomics

1.1.4.     Construction Economics

1.2.         Tools and Presentations.1

1.2.1.     Definitions

1.2.2.     Economic Scholars

1.2.3.     Assumptions

1.2.4.     Case Studies

1.2.5.     Observations

1.2.6.     Summaries

1.3.         Methodological Approach

1.3.1.     Laws and Regularities

1.3.2.     Focus and Goals

1.3.3.     Descriptive and Normative Economics

1.4.         Theoretical Background

1.4.1.     Industrial Economics

1.4.2.     New Institutional Economics

1.4.3.     Game Theory

1.4.4.     Auction Theory

1.4.5.     Behavioral Economics

1.4.6.     Economics of Information

1.4.7.     Law and Economics

1.5.         What You Can and Cannot Expect

1.6.         Audience

1.6.1.     Students

1.6.2.     Lecturers

1.6.3.     Academics

1.6.4.     Contractors

1.6.5.     Owners

1.6.6.     Policymakers

1.7.         Structure of the Text

1.7.1.     Basic Economic Principles

1.7.2.     Consumers in Perfectly Competitive Markets

1.7.3.     Producers in Perfectly Competitive Markets

1.7.4.     Interaction in Perfectly Competitive Markets

1.7.5.     Imperfect Markets

1.7.6.     Factor Markets

1.7.7.     Information, Risk, and Uncertainty

1.7.8.     Game Theory and Auctions

1.7.9.     Construction Sector

1.7.10.   Theory of the Owner

1.7.11.   Theory of the Contractor

1.7.12.   Construction Goods

1.7.13.   Construction Markets

1.7.14.   Contracting

1.7.15.   Market Imperfections

1.7.16.   Government

1.7.17.   Public Construction Goods

1.7.18.   Conclusion

1.7.19.   Synopsis

References

Part A: Microeconomics

Case Study 2.1 Berlin (1994)

2.1 Consensual Ideas

2.2          Scarcity and Choice

2.3          Decision-Making

2.3.1      Opportunity Costs

2.3.2      Incentives

2.3.3      Marginal Decisions

2.4          Markets

2.5          Trade and Comparative Advantage

References

Case Study 3.1 Car or House?

3.1          Perfectly Competitive Markets

3.2          Consumer Behavior

                3.2.1 Budget Constraint

                3.2.2 Preferences and Utility Funcitons

                3.2.3      Utility Maximization

3.3          Demand Curve

3.4          Further Reading

References

Case Study 4.1 Thinking about Your Own Construction

4.1.         Producer Behavior

4.2.         Production Theory

4.2.1.     Technology

4.2.2.     Production Functions

4.3.         Cost Theory

4.3.1.     Cost Curves for Classical Production Functions

4.3.2.     Cost Curves for Neoclassical Production Functions

4.3.3.     Cost Curves for Limitational Production Functions

4.3.4.     Simplified Cost Function with Constantly Increasing Variable Costs

4.3.5.     Long-Run Cost Curves

4.4.         Supply Curve

4.4.1.     Short-Run Supply Curve of a Firm

4.4.2.     Long-Run Supply Curve of a Firm

4.4.3.     Market Supply Curve

References

Case Study 5.1: Your Own Company, a Precast

5.1.         Equilibrium Price and Quantity

5.2.         Comparative Statics

5.3.         Elasticities of Demand and Supply

5.4.         Consumer and Producer Surplus

5.5.         Time-Dependent Supply Curves and Market Outcomes

5.5.1      Very-Short-Run Supply Curve

5.5.2      Short-Run Supply Curve

5.5.3      Long-Run Supply Curve

5.6.         Welfare

5.7.         Efficiency and Equity

Case Study 5: Why Do You Always Have to Deal with Competition?

6.1.         Monopoly

6.1.1.     Normal Monopolies

6.1.2.     Natural Monopolies

6.2.         Monopolistic Competition

6.3.         Monopsony

6.4.         Oligopoly

Case Study 7.1 Demand or Supply?

7.1.         Factor Supply of Households

7.1.1.     Labor Supply

7.1.2.     Capital Supply

7.2.         Factor Demand of Firms

7.3.         Demand and Supply on Factor Markets

Case Study 8.1 Uncertainty?

8.1          Uncertainty

                8.1.1      Risk Attitudes

                8.1.2      Risk Strategies

                8.1.3      Transaction Cost

8.2          Information

                8.2.1      Satisficing Model of Decision-Making

                8.2.2      Asymmetric Information

Reference

Case Study 9.1 Bidding

9.1          Game Theory

9.1.1.     Basics of Game Theory

9.1.2.     Static Games with Complete Information

9.1.3.     Dynamic Games with Complete Information

9.2          Auctions

9.1.4.     Basics of Auctions

9.1.5.     English and Vickrey Auctions

9.1.6.     Dutch Auctions and Sealed-Bid Auctions

9.1.7.     Competitive Bidding

Part B: Applied Construction Microeconomics

10 Construction Sector

10.1.      Definition

10.2.      Economic Contribution

10.2.1.   Value-Added Concept

10.2.2.   Investment Concept

10.2.3.   Multiplier Concept

10.3.      Actors in the Construction Sector

10.3.1.   Market Demand

10.3.2.   Market Supply

10.4.      Summary of the Construction Sector

References

11 Theory of the Owner

11.1.      The Owner as an Entity

11.1.1.   Terminology

11.1.2.   Images and Prejudices

11.1.3.   Organization

11.2.      Tasks of the Owner

11.3.      Behavior of the Owner

11.3.1.   Consumers Buying Construction Goods

11.3.2.   Producers Buying Construction Goods

11.4.      Information of the Owner

11.5.      Developing a Contract

11.6.      Procurement of a Contractor

11.7.      Supervision of the Construction Process

11.8.      Summary

12 Theory of the Contractor

12.1.      The Contractor as an Entity

12.1.1.   Cooperation

12.1.2.   Organization

12.2.      Tasks of the Contractor

12.3.      Behavior of the Contractor

12.3.1.   Strategy

12.3.2.   Legal Organization

12.3.3.   Growth of the Firm

12.4.      Information of the Contractor

12.5.      Bidding and Pricing

12.6.      Contractor Pricing

12.7.      Production

12.7.1.   General Characteristics

12.7.2.   Production Determinants

12.7.3.   Production Functions and Cost Curves

12.7.4.   Production Decisions

12.8.      Summary

References

13 Construction Goods

13.1        Goods and Services

13.1.1.   Heterogeneity

13.1.2.   Construction Goods as Transitional Performance Bundles

13.1.3.   Construction Goods as Contract Goods

13.1.4.   Construction Goods as Investment

13.1.5.   Construction Goods as Services

13.1.6.   Summary of the Characteristics of Construction Goods

13.2        Typology of Construction Goods

13.2.1    Approach to Developing a Typology

13.2.2    Conceptualization

13.3.3    Applications

13.3        Summary

References

14           Construction Markets

14.1.      Characteristics of Markets

14.2.      Particularities of Construction Markets

14.2.1    Goods

14.2.2    Owners

14.2.3    Markets

14.2.4    Summary

14.3.      Analysis of Construction Markets

14.3.1    Heterogeneity

14.4.      Owners

14.5.      Contractors

14.5.1    Supply

14.5.2    Information

14.6.      Geography of Construction Markets

14.6.1.   Regional Markets

14.6.2.   National Markets

14.6.3.   International Markets

14.6.4.   Multinational Markets

14.6.5.   Global Players and Global Markets

14.7.      Entry and Exit Barriers

14.7.1.   Effects of the Business Cycle

14.7.2.   Number of Exits and Entries

14.8.      Summary

References

15 Contracting

15.1.      Construction Goods

15.2.      Construction Markets

15.3.      Owner's Demand

15.4.      Contractor's Supply

15.5.      Construction Contracts

15.6.      Contracting Market Design

15.7.      Pricing of Construction Contracts

15.7.1.   Marginal Cost Decisions Versus Markup Pricing

15.7.2.   Auctioning

15.7.3.   Sealed-Bid Auctions

15.8.      Supply and Demand in Construction

15.9.      The Owner as Monopsonist

15.10.    Bargaining for the Contract Price

15.11.    Change Orders and Claims

15.12.    Summary

16           Market Imperfections

16.1.      Imperfect Information

16.2.      Externalities

16.3.      Collusion and Corruption

16.3.1    Collusion

16.3.2    Corruption

16.4.      Mechanics or Ethics of Collusion

16.5.      Conclusion

References

17 Government

17.1.      Government as Actor on Markets

17.2.      Taxes and Subsidies

17.3.      Regulations

17.4.      Interest Rates

17.5.      Inflation

References

18 Public Goods

18.1.      Characteristics of Private Goods

18.1.1    Rivalry

18.1.2    Excludability

18.2.      Theory of Public Goods

18.2.1    Demand of a Public Good Based on Utility

18.2.2    Demand for a Public Good Based on Willingness to Pay

18.3.      Free Riding

18.4.      Cost–Benefit Analysis

18.5.      Construction Goods as Public Goods

18.6.      Strategic Misrepresentation and Optimism Bias

References

19           Conclusion

19.1.      Methodical Context

19.2.      Owners

19.3.      Contractors

19.4.      Construction Goods

19.5.      Construction Markets

19.6.      Contracting

References

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