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Unit - 1

INTRODUCTION TO BUILDING ECONOMICS


Building economics is concerned with production and
consumption and services and the analysis of commercial
activities
As it is related to architecture and building activity all types
of buildings for all types of functions by the builders
(production) and consumption i.e., the ones who either buy or
hire those buildings for various functions with the services
offered by professionals like architects, planners, engineers
etc.
Ends scarce means
The scarce means like land, building materials, and allied
services result in failing to meet the deman in housing sector.
Basic concept any activity (legally permitted) which shall
result in building activities to serve people for which the
people are ready to pay the price directly or indirectly by
buying or hiring the spaces can be treated as an economic
activity.
Goods and services : Economic good is a physical object like
natural or manmade (artificial) goods.
Natural goods : Sources like land, water, air, natural stones,
sand basic raw materials to be converted to manmade
materials to be used for construction of buildings.
Manmade goods : Product like mosaic tiles, tiles of all
stones, ceramic tiles, wall finishes, doors/windows/woodwork,
electrical materials, water supply and sanitary pipes and
fittings etc, harnessing solar power, A/C plants, heating,
cooling etc.
Producers : Producers are individuals, builders, contractors in
private sector or governments state or central.
Primary producers are those who produce raw materials like
wood, stones, basic raw materials for production of building
materials.
Secondary producers are those who are engaged in production
of materials like cement, procure sand, metal, steel,
aluminium, various other materials to be used in building
construction.
Tertiary producers: Tertiary producers are those who carry
out the following functions:

Transportation
Banking
Architects and Engineers etc who offer services,
insurance agencies for buildings, educational
institutions, who train professionals.

Consumers : In good old days, there was barter system with


no profit motive. Present days, the medium of exchange is
money which is used in so many forms for buying and selling
for all activities.
MICRO ECONOMICS
It is a small part of whole economics which deals with
individuals, their needs, their behaviour, individual firms and
its activities. This deals with studies like incomes, capital
spending on building, individuals who are engaged in various
products for building construction. Micro-economics is also
called Price Theory.
Importance of Micro-economics : It analyses how millions
of consumers and producers in an economy take decisions
about products and services offered. It also deals with how
buildings and services are distributed belonging to different
economic status.
Limitations

It cannot give an idea of the function of the economy


as a whole.

It assumes full employment which is a rare


phenomenon in developing countries or even
developed countries which is quite unrealistic.

TERMS RELATED TO MICRO ECONOMICS.


Budget constraints : For individuals, the budget for acquiring
property depends in the earning capacity of the family per
annum, the ability to raise loan, savings, repaying capacity (in
5year/ 10year/ 15year loan periods).
Choice: Depends on the budgetary capability, savings,
willingness to invest, optimum level to spend, location of the
property etc, choice of the specifications, reputation of the
builders, quality of construction, timely completion of
projects, proximity to public amenities like transport, railway
station, airport etc.
Demand and supply :
Depends on National income, financial status of the family to
invest, stability of the job, location of the place of works,
means of transportation.
Supply depends on the builders who are willing to invest in
construction to meet the demand of various economic level of
buyers.
Uncertainties : Depends on the stability of the elected
governments at state/central, cost of living availability of land
at affordable level, building materials, availability of loans at
reasonable rates of interest, skilled and unskilled labour,
manpower, government policies, natural calamities, riots,

inflation, global economy as well as national economy,


imports/exports, technical knowhow.
Equilibrium : Normally, this factor depends on demand and
supply which are interdependent to maintain perfect
equilibrium, policies in five year plans and execution as per
scheduled programs.

It overlooks individual differences, the general level


of prices may be assumed stable, but the food grains
and building materials and consumer goods may go
up very high which may cause havoc for the poor and
middle class.

Conclusion

Technical constraints : Appropriate technology either


indigenously developed or acquired from other countries,
availability of technical expertise like architects, planners,
engineers, willing efficient builders, innovative technology to
build eco-friendly buildings as appropriate to our country and
global warming is the need of the hour.

According to some eminent economists, the subject matter of


economics includes the Price Theory (micro-economics),
income theory (Macro-economics), employment theory,
growth theory. All these are interdependent on each other.

Profit maximization and cost minimization

At national level, this depends on the government policies.


How different building activities and infrastructure are
planned and budgeted. Taxation polices, direct and indirect
tax, allocation of funds for housing for the weaker sections in
Five Year plans.

These aspects are to be monitored by governmental agencies


or some non-governmental agencies so that builders do not
make too much profit taking advantage of the demand as it is
happening in the building industry.

Demand and Supply

Inflation
Building industry comes under ambit of Consumer Protection
Act. There should be strict rules by sanctioning authorities to
see that the building is constructed as per sanction and
specifications.
Monopoly and Oligopoly
In the building industry, there is no monopoly. The only
department in central government, which does not have
architects is Ministry of Railways and AP state. They are
managed by engineers only. There is oligopoly in the building
industry i.e., there are reputed builders and reputed producers
of building who produce quality building materials because of
intense competition.

This aspect depends on how effectively the government can


control inflation by exercising control over general price rise
and building materials, effective tax collection both at central
and state level, maintaining equilibrium in demand and
supply, earning foreign exchange. The increase in oil prices
invariably increase the cost of living in all walks of life
including building industry.
Interest rate
The finance ministry through RBI (Reserved Bank of INDIA)
controls the interest rates over products, personal incomes,
including housing loans and building materials.

Production

Employment

The demand for housing is always more than the production


either in government sector or private sector. The production
is occasionally affected by inflation, global economic
recession, rising cost of living, over population, scarcity of
land in metros and other cities. Lack of proper mass
transportation. Availability of infrastructure.

Now major employment takes place only in private sector.


Only an insignificant percentage of employment takes place in
central government and state governments. Pension schemes
have to be discontinued by the governments. The
unemployment rate is very high now either in the
underemployment, or employment which is not compatible to
qualifications, and resulted in crime rate to unprecedented
level by either educated or uneducated youth.

MACRO ECONOMICS
It deals with aggregates and averages of entire economics like
national income, aggregate products, aggregate outputs, total
employment, total consumption, savings and investments,
aggregate demand, aggregate supply, general level of prices.
Here it also studies how these aggregates are fluctuating and
affecting the economic growth of the country. Macro
Economics is also called Income Theory.
Limitations

Individual is altogether ignored.

Lack of proper education like basic education, education in


trades which helps the weaker sections.
Savings and Investments
Government through nationalized banks, financial institutions,
public schemes can attract savings by offering reasonable
interest on the public investments.

Monitory system and policies

EQUITY VERSUS EFFICIENCY IN ECONOMICS

The monitory systems are controlled by RBI through


nationalized banks, LICHFL, HDFC, HUDCO, which offer
housing loans. The overall policies are controlled by central
government and sometimes implemented by state
governments.

Efficiency in Economics
Capability and able to perform duties well. The efficiency in
production of building materials is high as there is competition
and those who work in production are offered annual bonus
depending upon the profits made by companies.

Fiscal Policies
Some Fiscal policies are controlled by Central Government
and some by State Government by levying taxes like sales tax,
excise tax, income tax, import/export duties, property tax,
wealth tax, taxes on investments in fixed deposits if the
interest earned is more than 10,000/ per year, taxation is either
directly or indirectly.

The efficiency in construction industry is generally high if the


projects are handled by Architects, Engineers, and experienced
builders. Unfortunately many constructions re handled by
builders who are not experienced.
This is due to the ignorance of the public and loss of
investments by the public. Most of such constructions are
mediocre.

Unit - 2
Equity in Economics
LABOUR INTENSIVE INDUSTRY VERSUS CAPITAL
INTENSIVE INDUSTRY
There is a problem of choosing between labour intensive
industries or Labour intensive methods and Capital Intensive
industries or Capital Intensive Methods. In under developed
countries, due to chronic unemployment or cheap labour to
capital is preferred.
The most efficient use of resources in less developed countries
will tend to favour labour intensive methods. For innovations,
it would also follow the Capital Saving and Labour using
innovations, it would be preferred. It would be profitable to
adopt capital-intensive techniques to increase productivity.
If the export industries are capital-intensive such as mining
and mineral refining, then, even though there is surplus labour,
extensive investment has to be done in order to earn necessary
Foreign Exchange.
For example, In India, Labour force is available in plenty.
This is the reason most of the building industry is Labour
Intensive including both skilled and unskilled labour.
Only certain prestigious projects are handled by Reputed
Building agencies like L&T, Raheja Builders etc who employ
only skilled labour force handled by all professionals like
Architects, Engineers, project Managers, etc and they handle
construction using precast building elements and heavy
equipment and machines.
They work on TURN KEY basis like designing and
execution on a time bound programmes. In construction of
International Airports, the private agencies invest the capital,
design, build and operate for certain number of years to
recover their investment and profits (BOT). Sometimes we
send skilled technical professionals, skilled labour to other
countries to help in their construction activity. Sometimes we
import Technical Knowhow for production of advanced
building materials for domestic consumption.

The central Government helps the public in offering fair rates


of interest of the public invests in Central Schemes like Indira
Vikaas Patrika (IVP), Postal Savings schemes which offer
Monthly income schemes on investment in Postal saving
schemes and they offer interest on fixed deposit also. Share
market is most risky as it is volatile.
PUBLIC PARTICIPATION VERSUS PRIVATE
PARTICIPATION
Public sectors like HUDCO, Hindustan steel, Heavy
Engineering corporation etc are controlled by Central
Government, Nizam Sugars, Allwyn Ltd, Praga tools etc are
controlled by the State Government of AP (Andhra Pradesh).
As far as Building Industry is concerned, materials like
cement, steel, wood, aluminium, brick manufacture, variety of
floor tiles, wall tiles, electrical materials, plumbing and
sanitary ware and fittings etc (to mention only few) are
produced in India resulting in quality products, at various
price levels to suit different economic levels of social strata.
Only Housing meant for central/state government employees
is controlled by central or State governments. The housing for
weaker sections are taken care of by State governments as a
policy of Government.
Generally the housing for weaker sections results in poor
quality of construction due to lack of proper control by state
government. The most neglected class in India are tribals still
remain poor even after 53 years of Independence.
Housing loans are available at RBI controlled rates of interest
for other classes of the society in India and also from General
Insurance Co (GIC), LIC Housing Finance Ltd, and Private
agencies. Certain Housing schemes are handled by Foreign
Direct Investment (FDI) as well result which result in quality
construction.

Unit - 3
BUILDING CONSTRUCTION ECONOMICS
We will be discussing Inputs into Building Construction in
terms of four important factors:
1.
2.
3.
4.

Land
Labour
Capital
Materials

Land
Marshall defines Land Land means the materials, and the
forces which nature gives us freely for the human beings
(other creatures as well), in land, in water, in air, light and
Heat.

Land is natures gift

Land has no supply price (supply remains same)


whether price of land is high or low

Land is permanent (lack of mobility)

Land lacks mobility in geographic sense

Provides infinite variation in fertility, utility, situation


etc

Labour
Any work whether manual or material which is undertaken for
a monetary consideration, is called Labour in economics.
Marshall defines Any exertion of mind or body
undergone partly or wholly with a view to some good
(consideration) other than pleasure, derived directly from
work.

Labour is inseparable from labourer.

Labourer has to sell his labour in person.

Labour has no reserve price.

Labour has weak bargaining power.

Labour force cannot be increased or decreased.

Capital
Refers to that part of mans wealth which is used in producing
further wealth or which yields an income. Land is considered
as a capital as:
1.
2.

It is free gift of nature.


Capital is perishable whereas land has no mobility.

The capital can be increased but the amount of land is fixed


and the value may vary depending on location. Capital
formation is the very core of the Economic development.
Without capital, Building industry cannot survive and flourish
for the benefit of the society.
Materials
Materials are available in two forms:
1.
2.

Natural Materials
Manmade Materials

Natural Materials
Natural materials such as stones, mud, minerals, water (wood),
ores for various materials like Gold, silver, copper, iron,
aluminium, sand etc.
Manmade Materials
These materials include bricks, stone blocks, tiles, granites,
marble, steel, aluminium, copper products, PVC, cement,
wood, plywood, laminates, paints, most of the building
materials.
Building industry put to use both natural and manmade
materials, to construct structures to cater to various needs of
human beings on the Gods Gift LAND.
Technological research in producing innovative new Building
Materials that can withstand suitably THE GLOBAL
WARMING, which is causing ecological imbalance at an
alarming rate and such innovations are the need of the hour.
This is true especially in the case of our country INDIA.

Unit - 4
FINANCING OF PROJECTS | ECONOMICS RELATED
TO BUILDING INDUSTRY
Financing of Projects is the most important factor determining
the success of the project. Various factors influence the
success of a project.
In this article, we are going to study the major factors that are
responsible for the success of the Building project
Here are the four factors:
1.
2.
3.
4.

Sources
Total Cost Estimation of the Project
Utility in Financing
Agencies and Institutions directly and indirectly
influencing the economic aspects of a project

Sources
Loans are available for both purchasers and Builders from:
All Nationalized Banks,
Co-operative Banks,
Private Banks,
LIC HFL,
Finance Companies,
Insurance Companies like General Insurance Co (GIC),
United India Insurance Co Ltd, National Insurance Co Ltd,
Oriental Insurance Co Ltd, New India Assurance Co Ltd (for
the employees), Foreign Direct Investment FDI, 20
Nationalised Banks along with Regional Rural Banks come
under Public sector.
Commercial Banks, Cooperative Banks operate under
provisions of Cooperative societies Law of states for credit
and non-credit purpose.
National Bank of Agriculture and Rural Development
(NABARD) help Farming sector.
Total Cost Estimation of the Project
Price to be paid for a things like;

The cost of living


General level of prices
The cost of price of an article
Cost of production
Cost of house or property

A house should be built based on an estimated cost. If the


building cost increases, it will be a loss and if it can be
reduced, it will be a saving for the individual as well as for the
company as a whole.
Utility in Financing
Proper utility of the available financial resources in a planned
manner will result in the success of the projects. Any improper
planning, lack of technical expertise, under utility of
technology and expertise will result in the losses of the project
as well as loss to the resources of the Nation as a whole.
Agencies and Institutions directly and
influencing the economic aspects of a project

indirectly

Interest rates by banks, availability of materials (products,


producers of materials), Governmental agencies, both central
and state policies in making finances available for loans,
personal savings, demand and supply, Population (Growing in
India and decrease in some western countries).
Economic stability of the country, Global Economy, Location
of the projects, Inflation or Deflation. All the agencies those
advance Housing loans like Specialised Financing agencies
like HUDCO, HDFC, National Housing Bank (NHB). More
than 90% of the dwelling units are financed by Housing and
Urban Development Corporation (HUDCO) for economically
weaker sections and Low Income Group.