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Building Economics
Introduction
How Economy Works
– The circular flow diagram shows the transactions among
households, firms, governments, and the rest of the world
How Economy Works
– These transactions take place in factor markets, goods
markets, and financial markets.
How Economy Works
– Firms hire factors of production from households. The blue
flow, Y, shows total income paid by firms to households.
How Economy Works
– Households buy consumer goods and services. The red
flow, C, shows consumption expenditures.
How Economy Works
– Households save, S, and pay net taxes, NT. Firms borrow
some of what households save to finance their investment.
How Economy Works
– Firms buy capital goods from other firms. The red flow I
represents this investment expenditure by firms.
How Economy Works
– Governments buy goods and services, G, and borrow or
repay debt if spending exceeds or is less than net taxes.
How Economy Works
– The rest of the world buys goods and services from us, X,
and sells us goods and services, M. Net exports are X – M.
How Economy Works
– And the rest of the world borrows from us or lends to us
depending on whether net exports are positive or negative.
Economics and Choice
• Economics is the study of how individuals and society
manages its scarce resources.
• “Economics is the study of how people and society
choose to employ scarce resources that could have
alternative uses in order to produce various
commodities and to distribute them for consumption ,
now and/or in the future among various persons and
groups in the society” by Samuelson and Nordhaous
Engineering Economics
1887 : The Economic Theory of the Location of Railways, written by Arthur M.
Wellington
– Capitalized cost method of analysis for preferred lengths of rail lines
1920: C. L. Fish and O.B. Goldman
– Compound‐interest procedure for investments in engineered structures
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Introduction to Building Economics
"We no longer build buildings like we use to, nor do we pay for them in the same
way. Buildings today are...life support systems, communication terminals, data
manufacturing centers, and much more. They are incredibly expensive tools that
must be constantly adjusted to function efficiently. The economics of building has
become as complex as its design." (Wilson)
Building Economics is microeconomic (how individual actors in economic realm make economic
plans and decisions) analysis which studies the economic implications of architectural design
decisions and impacts of these decisions. It includes:
Engineering Economics
Real Estate Economics
Urban Economics
Energy Economics
Environmental Economics
It includes Construction Estimate, Construction Management, Project Management,
Construction Financing, Real Estate financing etc.
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Relevance of Building Economics
• Architectural design decisions can be expensive. Therefore more and more resources
should be allocated to the careful analysis, evaluation and comparison of design
schemes at early design stages.
• Buildings now‐a‐days cost almost quarter to one half of monthly income of a person.
That is a large amount to be spent as initial cost. The cost of operation and
maintenance is much more than the initial cost. And not forgetting the labor cost,
which is rising high day by day.
• All these things which disturb a client are in fact under architect’s own control. Clients
expect workable economic solutions to these problems.
• Architect can analyze these things in the critical design time and workout solutions.
Thus they can also judge cost implications of various design alternatives.
• All buildings are investments, and that economic assessment is a two‐edged exercise:
the process of evaluating the return, combined with the process of estimating the cost ‐
‐ how much the client will pay.
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Relevance of Building Economics
• Design engineers in the past have applied simple economics to their designs, with the
interests of their clients in mind.
• Now‐a‐days, designers have become ‐ under environmental, social and other
pressures ‐ more sophisticated in their application of economics. Indeed, "socio‐
economics" has become increasingly important to more engineering professionals.
• In the same way, whereas buildings used to be looked upon as "inanimate", it has
recently become clear that the environment within buildings is important not only for
the welfare of the people using them but also for their productivity.
• In other words, another economic dimension has been imposed on the design,
construction and operation of buildings, which is very important.
• Technical solutions need to be suitable for use in a dynamic economic environment.
• Changing government regulations, tax system, market factors, etc.
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Relevance of Building Economics
• The problem here is to be able to measure benefits and costs as functions of the design
solution. The key problem is measurement. But in the end, even if there is a benefit,
the loop has to be closed by asking the question ‐ who will pay? Someone has to pay.
• The assumption, these days, that an architect or engineer is in possession of everything
he ought to know is being challenged.
• To take an example, life‐cycle cost analysis
Economics offers a powerful tool for
bringing order and understanding to
business and is in fact being used very
effectively to evaluate new technologies
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Relevance of Building Economics
• It allows us to address scale problems ‐‐ how much investment is it economically
efficient to put into different kinds of features.
• It allows us to address trade‐offs between different kinds of building features. We can
assemble packages for energy conservation to achieve the largest set of benefits for a
given budget.
• We can rank investment projects and levels in an order of priority.
• We are able to address safety issues, even from the standpoint of looking at how
much it is economical to spend to prevent a particular hazard from occurring, or we
can identify a level, or objective, for minimizing ‐ say ‐ earthquake damage and the
combination of safety measures which will provide the most efficient package for
addressing such a situation.
• Economics gives us tools for addressing the problems of building productivity, which is
currently in quite a depressed state, for identifying the areas in which these problems
lie, and for developing ways in which improvements can be made.
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Relevance of Building Economics
To what extent can the architect influence the building process? How well does the
architect sell his product?
• The economic analysis of projects goes back at least to the 1930's. Since that
time, economic analysis has been integrated into the decision making process.
Building owners use economic analysis to determine the most economically
efficient or cost‐effective choice among building alternatives.
• From one perspective of the client, time is money. Architect can in fact speed
up the construction process.
• Building economics is also very important if we study the role of building
industry in national economy
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Why is Building Economics
• Although the construction industry is producing a product‐as do manufacturing plants‐
the construction of buildings, roads and other structures is different from the
manufacturing of most other products.
• Because of the unique characteristics the principles applied to other product‐producing
industries often need to be modified.
• Objective is to help construction professionals to learn why and how strong financial
management is needed in the construction industry.
– To cover the fundamental principles needed for construction sector to successfully carryout
investment decisions and manage the finances of Public/Private Sector.
• These principles are scattered among many disciplines
• Business management, Engineering economics, Accounting and estimating, and Project management
– Construction sector is a risky venture and requires a specialized set of financial management
skills, because of the unique nature of the construction industry
• Constantly building unique, one‐of‐a‐kind projects
• Building a project at a different location each time
• Dealing with retention and progress payments, etc
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Course Outline
• Economic Performance Analysis of Construction and Real Estate
Projects
• Economic Efficiency of Investment
• Real Estate Valuation Methods
• Economic Appraisal Techniques for Real Estate Projects
• Financial Feasibility Analysis for Building projects
• Financing Construction Projects
• Sources, Phases, Construction Financing, Financing Public Projects
• Public Policies and Construction Industries
• Various Government Policies and Their Impact on Construction and real estate
sector.
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