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Lecture 2

QSM 506
Construction Economics

Supply and Demand in Construction Industry

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SUPPLY

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Supply and Demand in General
SUPPLY:

Ability and willingness to sell or produce particular


goods or services in a given period of time at a
particular price

Law of supply:

When price increase, the quantity supplied also


increase
When price falls, the quantity supplied will fall
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Law of supply:

The Law of Supply is the direct relationship between price and quantity supplied.
If everything else remains the same, then an increase in price results in an increase
in quantity supplied.
The positive relationship is the reason for the supply curve sloping upwards.
The rationale for the positive correlation between price and quantity supplied is
based on the potential increase in profitability that occurs with an increase in price.
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Supply and Demand in General

Factors affecting supply

Climatic conditions
Costs of production
Technological advancement
Government policies
Time period
Price of related goods; competitive supply, joint
supply
Price of the good itself

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Supply and Demand in General

Factors affecting supply

1.Climatic conditions

-Implies that climatic conditions directly affect the


supply of certain products.
-For example, the construction process decreases
when monsoon comes

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Supply and Demand in General
Factors affecting supply

2. Costs of production
-Implies that the supply of a product would decrease with
increase in the cost of production and vice versa. The
supply of a product and cost of production are inversely
related to each other. For example, a seller would supply
less quantity of a product in the market, when the cost of
production exceeds the market price of the product.

-In such a case the seller would wait for the rise in price in
future. The cost of production rises due to several factors,
such as loss of fertility of land, high wage rates of labour,
and increase in the prices of raw material, transport cost,
and tax rate. 7
Supply and Demand in General
Factors affecting supply

3. Technological advancement
-Refers to one of the important determinant of supply. A
better and advanced technology increases the production
of a product, which results in the increase in the supply of
the product.
-ie: Technology determines the alternative methods of
combining labor, capital, and land in the production of
output. Technological improvement will reduce costs and
increase the profit margin on each unit sold which will in
turn increase the supply.

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Supply and Demand in General
Factors affecting supply

4. Government policies
-Implies that the different policies of government, such as
fiscal policy and industrial policy, has a greater impact on
the supply of a product.
-For example, increase in tax on excise duties would
decrease the supply of a product. On the other hand, if
the tax rate is low, then the supply of a product would
increase.

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Supply and Demand in General

Factors affecting supply


5. Time period
-Over time, firms are able to increase capacity and
are able to increase Supply.

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Supply and Demand in General

Factors affecting supply


6. Price of related goods; competitive supply, joint supply
-Refer to fact that the prices of substitutes and
complementary goods also affect the supply of a product.
-For example, if the price of wheat increases, then
farmers would tend to grow more wheat than nee. This
would decrease the supply of rice in the market.

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Supply and Demand in General
Factors affecting supply

7. Price of the good itself

-Act as one of the major determinant of supply. The inputs,


such as raw material man, equipment, and machines,
required at the time of production are termed as factors. If
the factors are available in sufficient quantity and at lower
price, then there would be increase in production.
-This would increase the supply of a product in the market.
For example, availability of cheap labour and raw material
nearby the manufacturing plant of an organization would
help in reducing the labour and transportation costs.
Consequently, the production and supply of the product 12

would increase.
Supply and Demand in General

DEMAND=Effective DD

Ability and willingness to buy specific quantities of goods


or services in a given period of time at a particular price .

Law of Demand

When price increase, the quantity demanded will fall


When price decrease, the quantity demanded will rise

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Supply and Demand in General
Factors affecting demand

Fashion, taste, climate


Changes in income
Changes in population
Changes in price of related goods; complementary goods,
substitute goods

Advertisement
Introduction of new product
Social and economic conditions
Festive seasons
Speculation
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Supply and Demand in General

Factors affecting demand

1. Fashion, taste, climate


-The market demand is also affected by buyers
willingness to purchase different goods. The
tastes and preferences which affect this
willingness vary over time.

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Supply and Demand in General

Factors affecting demand

2. Changes in income
-When there is an increase in income the standard of
living improves causing more people to buy their own
houses which leads to an increase in the total demand
of house.
-But even the vice versa is true when there is decrease
in the income, more people will shift towards rented
housing i.e. the ability of customers to buy goods is
based directly on their income.
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Supply and Demand in General

Factors affecting demand

3. Changes in population?
As the population grows, there will be an
increase in demand for goods and services. The
more people are there, the more needs and
wants are required to be satisfied.

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Supply and Demand in General
Factors affecting demand

Its not only the size of the population that affects demand,
but the structure of the population also affects the demand.
Examples of this are:

a) Age distribution Many countries are now experiencing a


trend of ageing population. The reasons for this are, the
rising life expectancy and/or reduced birth rate. As the
median age of the population rises, there will be more
elderly people and thus increased demand for goods such
as retirement homes and specialist holidays for elderly
people.
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Supply and Demand in General
Factors affecting demand

3. Changes in population?
Its not only the size of the population that affects demand, but
the structure of the population also affects the demand.
Examples of this are:

2. Gender distribution Census in many countries has shown


that there are more women than men in those countries. And
the number of women to men is higher in older age groups.
This would affect the demand patterns. For example, there
will be more demand for womens clothing.
3. Geographical distribution As a country starts developing
and goes up in development, there is a tendency of the
population to move to urban areas. This will increase in 19

demand for goods and services in urban areas.


Supply and Demand in General
Factors affecting demand

4. Changes in price of related goods;


complementary goods, substitute goods
-When consumers consider buying a good, they usually consider the
prices of other goods which can be used instead of that particular good.
These goods are known as substitutes. For example, Pepsi is a direct
substitute of Coca-Cola. If the price of Coca-Cola decreases, the demand
for Pepsi will be decreased. Different types of energy drinks are close
substitutes of one another. If cheap substitutes are available, consumers
will opt to buy the cheaper ones. Therefore, the changes in the prices of
substitutes affect demand for a particular good.
- Complementary goods are those goods which are demanded together
with a particular good. For example, consumers of corn flakes will also
buy milk. Therefore, changes in the price of one of these products will
affect the demand for the other good. 20
Supply and Demand in General

Factors affecting demand

5. Advertisement
-why are businesses prepared to spend so much on
advertising? The reason is that it does affect demand.
-If a product is heavily advertised, the demand for that
product is likely to increase, especially if the
advertisement campaign is effective.

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Supply and Demand in General
Factors affecting demand

6. Introduction of new product


- eg : an introduction of new construction product
have high demand players if it will increase the
performance (ie: speed of construction) etc
- eg : At the moment, there is particular demand in
concrete coating for products with a long pot life and a
short cure time.Contractors and architects are looking
for coatings that can be workable for long periods of
time, allowing them to apply the coating before it starts
to set.
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Supply and Demand in General

Factors affecting demand

7. Social and economic conditions


- eg : how the demand of construction materials
during certain situation of economics conditions

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Supply and Demand in General
Factors affecting demand

8. Festive seasons
- eg : The festive season is an ideal time to take
advantage of lucrative offers from such developers,
such as all-inclusive price packages.
However, buyers should not be swayed by offers of
meaningless freebies and focus only on the actual
value being given.
Buying an affordable home is all about getting what one
needs within ones budget, not about bringing home
surplus white goods or paid vacations.
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Supply and Demand in General

Factors affecting demand

9. Speculation
-eg: In addition to the demand from people
wanting a house in which to live, there is a
speculative element to the demand for housing.
As one witness put it, 'houses are being valued
as speculative assets.

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SUPPLY IN CONSTRUCTION INDUSTRY

WHO SUPPLY?

HOUSING
COMMERCIAL AND INDUSTRIAL
INFRASTRUCTURE
REPAIR AND MAINTENANCE

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DEMAND IN THE CONSTRUCTION
INDUSTRY
Determination of Demand
Owned occupied
Investment

Determination of Price
Estimates = before completion
Actual price (Final account) = after
completion

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DEMAND

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DEMAND IN THE CONSTRUCTION
INDUSTRY
Demand for housing
- owner occupied sector
- private rented sector
- housing association sector
Demand for industrial and commercial
buildings
Demand for infrastructure and other
public sector construction
Demand for repair and maintenance
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DEMAND IN THE CONSTRUCTION INDUSTRY
Demand for housing
FACTORS AFFECTING DEMAND

OWNER OCCUPIED PRIVATE RENTED HOUSING ASSOCIATION

current price of current rent levels current price of


housing and expectations of housing (rent)
price of other forms change
price level of other
of housing income distribution forms of tenure
income & cost of borrowing assessment of need
expectations of change
law on rents and availability of finance
cost of borrowing security
money Levels of government
subsidy
government
incentives
price of associated
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goods and services
DEMAND IN THE CONSTRUCTION
INDUSTRY
Demand for industrial and commercial
FACTORS AFFECTING DEMAND

technological developments
Changes in taste and fashion
Expected levels of cost, including interest
rates
the state of economy and government policy
Business confidence
the age and condition of the existing premises
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DEMAND IN THE CONSTRUCTION
INDUSTRY
DD for infrastructure & other public sector
construction
FACTORS AFFECTING DEMAND
assessment of need
availability of finance and levels of
government subsidy
government policy
The age and condition of the existing stock

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DEMAND IN THE CONSTRUCTION
INDUSTRY
Demand for repair & maintenance
FACTORS AFFECTING DEMAND

the current cost of repair & maintenance


the cost of new building
level of current income
Government policy
the age & condition of existing stock
(its state of disrepair)
the owner-ship pattern 33
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