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- Herausgeber: John Wiley & Sons
- Kategorie: Wissenschaft und neue Technologien
- Sprache: Englisch
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.
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Table of Contents
Cover
Title Page
Copyright
Foreword by Gerard de Valence
Preface
References
1 Introduction
1.1 Navigating the Maze of Economic Literature
1.2 Tools and Presentations
1.3 Methodological Approach
1.4 Theoretical Background
1.5 What You Can and Cannot Expect
1.6 Audience
1.7 Structure of the Text
References
Part I: Microeconomics
2 Basic Economic Principles
2.1 Consensual Ideas
2.2 Scarcity and Choice
2.3 Decision-Making
2.4 Markets
2.5 Trade and Comparative Advantage
2.6 Government
References
3 Consumers in Perfectly Competitive Markets
3.1 Perfectly Competitive Markets
3.2 Consumer Behavior
3.3 Demand Curve
3.4 Further Reading
References
4 Producers in Perfectly Competitive Markets
4.1 Producer Behavior
4.2 Production Theory
4.3 Cost Theory
4.4 Supply Curve
References
5 Interaction in Perfectly Competitive Markets
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
5.6 Welfare
5.7 Efficiency and Equity
References
6 Imperfect Markets
6.1 Monopoly
6.2 Monopolistic Competition
6.3 Monopsony
6.4 Oligopoly
References
7 Factor Markets
7.1 Factor Supply of Households
7.2 Factor Demand of Firms
7.3 Demand and Supply on Factor Markets
References
8 Uncertainty, Risk, and Information
8.1 Uncertainty and Risk
8.2 Information
References
9 Game Theory and Auctions
9.1 Game Theory
9.2 Auctions
References
Part II: Applied Construction Microeconomics
10 Construction Sector
10.1 Definition
10.2 Economic Contribution
10.3 Actors in the Construction Sector
10.4 Summary of the Construction Sector
References
11 Theory of the Owner
11.1 The Owner as an Entity
11.2 Tasks of the Owner
11.3 Behavior of the Owner
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
References
12 Theory of the Contractor
12.1 The Contractor as an Entity
12.2 Tasks of the Contractor
12.3 Behavior of the Contractor
12.4 Information of the Contractor
12.5 Bidding
12.6 Contractor Pricing
12.7 Production
12.8 Summary
References
13 Construction Goods
13.1 Goods and Services
13.2 Typology of Construction Goods
13.3 Summary
References
14 Construction Markets
14.1 Characteristics of Markets
14.2 Particularities of Construction Markets
14.3 Analysis of Construction Markets
14.4 Owners
14.5 Contractors
14.6 Geography of Construction Markets
14.7 Entry and Exit Barriers
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
15.8 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
References
16 Market Imperfections
16.1 Imperfect Information
16.2 Externalities
16.3 Collusion and 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
18.2 Theory of Public Goods
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
Index
End User License Agreement
List of Tables
Chapter 1
Table 1.1 Importance of chapters to special audiences.
Chapter 2
Table 2.1 Comparison of consensual economic ideas.
Table 2.2 Opportunity costs bachelor versus master's degree.
Table 2.3 Cost for Firm-C and Firm-S.
Chapter 4
Table 4.1 Profits in accounting and economics.
Table 4.2 Summary of the classical production function.
Chapter 5
Table 5.1 Elasticity of a straight-line demand curve.
Table 5.2 Impact of price elasticity and price changes on total revenue.
Table 5.3 Price decreases, price elasticity and total revenue.
Table 5.4 Examples of income and price elasticity.
Chapter 6
Table 6.1 Typology of market structures based on numbers of buyers and selle...
Table 6.2 Typology of market structures with differentiated products.
Chapter 8
Table 8.1 Example of risk diversification.
Table 8.2 Transaction costs for contract goods in construction.
Table 8.3 Opportunism in principal–agent relationships due to asymmetric inf...
Table 8.4 Example of moral hazard and hidden action.
Chapter 9
Table 9.1 Payoff matrices for two players.
Table 9.2 Expectancy values for bids in sealed-bid auctions.
Chapter 10
Table 10.1 Economic sectors and NACE sections.
Table 10.2 Value added by sectors in different countries (2020).
Table 10.3 Employment by sectors in different countries (2021 or latest avai...
Table 10.4 Comparison of the economic contributions of three industries/sect...
Table 10.5 Construction investment in the EU (2019).
Table 10.6 Example of the multiplier effect.
Table 10.7 Multiplier for construction investments in Germany, 2007.
Table 10.8 Number of building permits in Germany, 2020.
Table 10.9 Number of construction firms in selected EU countries (2019).
Table 10.10 Average number of employees in construction of the EU. 2019.
Table 10.11 Number of employees in the construction industry in Germany, 201...
Table 10.12 Herfindahl–Hirschman Index for different sectors in Germany 2008...
Chapter 11
Table 11.1 Comparison between a buyer of an automobile and an owner in const...
Table 11.2 Typical design and construction process.
Table 11.3 Use of information asymmetries.
Table 11.4 Procurement decisions and market designs.
Table 11.5 Consumer in commodity markets and owners in construction markets....
Chapter 12
Table 12.1 Differences between accounting and economic profits.
Table 12.2 Estimated economic profit for structural works in Germany in 2019...
Table 12.3 Synopsis of market characteristics.
Table 12.4 Production differences between construction and manufacturing.
Table 12.5 Locational features of production methods.
Table 12.6 Advantages and disadvantages of production methods.
Table 12.7 Characteristics of the degree of automatization in construction....
Table 12.8 Advantages and disadvantages of the amount produced.
Table 12.9 Advantage and disadvantages of continuous/discontinuous productio...
Table 12.10 Limitational production function for the BangNa Expressway.
Table 12.11 Manufacturers and contractors in comparison.
Chapter 13
Table 13.1 Different types of buildings and infrastructure.
Table 13.2 Characteristics of different types of goods.
Table 13.3 Typology of construction goods in new institutional economics.
Table 13.4 Problems in principal/agent relationships.
Table 13.5 Consequences of opportunistic behavior.
Table 13.6 Possibilities of opportunistic behavior in the case of contract g...
Table 13.7 Comparative characteristics of construction goods.
Table 13.8 Characteristics of systematic orders.
Table 13.9 Existing combinations of dimensions.
Chapter 14
Table 14.1 Typical market configurations.
Table 14.2 Characteristics of perfectly competitive and construction market....
Table 14.3 Structure of construction firms in Germany 2008, 2020.
Table 14.4 Input factors in structural works, finishing works and automobile...
Table 14.5 Characteristics of firms in different geographical markets.
Table 14.6 Geographic distribution of turnover for Skanska and Strabag.
Table 14.7 Supply and demand for general contractors in Bremen, Germany.
Table 14.8 Percentage of identical competitors in submissions.
Table 14.9 Approximated Herfindahl–Hirschman Index for the German constructi...
Table 14.10 Market forms based on centration ratios.
Table 14.11 Market forms in construction and supplying industries.
Table 14.12 Top five German international contractors in 2019.
Table 14.13 Number of international firms and revenue per country 2019.
Table 14.14 Subsidiaries of Actividades de Construcción y Servicios (ACS).
Table 14.15 Revenue of the top 15 international contractors.
Table 14.16 Ranking of the top nine German construction firms 1998 and 2019....
Table 14.17 Characteristics of construction markets.
Chapter 15
Table 15.1 Subsectors of US construction spending.
Table 15.2 Result of licitations.
Table 15.3 Expectancy values in first-price sealed-bid auctions.
Chapter 16
Table 16.1 Classification of externalities.
Table 16.2 Payoff matrix for a collusive duopoly.
Table 16.3 Ranking of sectors according to degree of corruption.
Table 16.4 Corruption perception index.
Chapter 17
Table 17.1 Repayment of a mortgage rate at two different interest rates.
Chapter 18
Table 18.1 Categorization of goods based on rivalry and excludability.
Table 18.2 Market outcomes for nonexcludable and nonrival goods.
Table 18.3 Payoff matrix for the free riding problem.
Table 18.4 Cost overruns for selected infrastructure projects.
Chapter 19
Table 19.1 Economic first principles and construction.
List of Illustrations
Preface
Figure 0.1 Looking south from the observation deck of the Empire State Build...
Figure 0.2 Economic embeddedness.
Figure 0.3 Economics cannot be modeled as a machine.
Chapter 1
Figure 1.1 The gap between construction and microeconomics.
Figure 1.2 Categorizing textbooks on economics.
Figure 1.3 Newton's
Philosophiæ Naturalis Principia Mathematica
(first ...
Figure 1.4 Prediction of the effect of a recession on unemployment (Mankiw 2...
Figure 1.5 Classification of economic disciplines within construction.
Chapter 2
Figure 2.1 Dance of the tower cranes at Potsdamer Platz, Berlin.
Figure 2.2 Land of Cockaigne, a utopia of waste.
Figure 2.3 Flow diagram of an economy.
Chapter 3
Figure 3.1 Equilibrium in a perfectly competitive market.
Figure 3.2 Budget line and budget set.
Figure 3.3 Shifts of the budget line due to income or price increases.
Figure 3.4 Indifference curve.
Figure 3.5 Decreasing marginal utility (beer).
Figure 3.6 Utility maximising choice for a given budget.
Figure 3.7 Marginal rate of substitution.
Figure 3.8 Utility function and marginal utility.
Figure 3.9 Construction of an individual demand curve.
Figure 3.10 Aggregate demand curve.
Chapter 4
Figure 4.1 Production possibility frontier.
Figure 4.2 Two-dimensional vector space for production.
Figure 4.3 Important forms of technologies.
Figure 4.4 Impact of technology changes.
Figure 4.5 Marginal rate of technical substitution.
Figure 4.6 Classification of production functions.
Figure 4.7 Classical production function.
Figure 4.8 Cobb–Douglas production function.
Figure 4.9 Diminishing returns in a Cobb–Douglas production function.
Figure 4.10 Isoquants for a neoclassical production function.
Figure 4.11 Total factor variation, elasticity of scales.
Figure 4.12 Linear-limitational production function.
Figure 4.13 Effect of technological change.
Figure 4.14 Learning effect for a classical production function.
Figure 4.15 Cost function based on a classical production function.
Figure 4.16 Cost curves for a classical production function.
Figure 4.17 Minimal cost combination.
Figure 4.18 Cost function based on a neoclassical production function.
Figure 4.19 Cost curves for a neoclassical production function.
Figure 4.20 Cost function based on a limitational production function.
Figure 4.21 Cost function and curves for constantly increasing variable cost...
Figure 4.22 Long-run average cost curve.
Figure 4.23 Short-run supply curve.
Figure 4.24 Influence of price levels on decision-making by producers.
Figure 4.25 Long- and short-run supply curve by a firm.
Figure 4.26 Long-run supply curve for constant average costs.
Figure 4.27 Short-run market supply curve.
Chapter 5
Figure 5.1 Market equilibrium in perfectly competitive markets.
Figure 5.2 Equilibrium and instability.
Figure 5.3 Market surplus.
Figure 5.4 Market shortage.
Figure 5.5 Contraction of demand.
Figure 5.6 Expansion of supply.
Figure 5.7 Demand and supply elasticities.
Figure 5.8 Elasticities of a straight-line demand curve.
Figure 5.9 Price changes and changes of total revenue.
Figure 5.10 Consumer and producer surplus.
Figure 5.11 Consumer surplus for elastic and inelastic demand.
Figure 5.12 Changes to the surpluses by a shift in supply.
Figure 5.13 Very short run supply curve.
Figure 5.14 Short run supply curve.
Figure 5.15 Short run curve with increase in demand.
Figure 5.16 Long-run supply curve.
Figure 5.17 Lorenz curve and Gini coefficient.
Figure 5.18 Global data of the Gini coefficient.
Chapter 6
Figure 6.1 Profit maximization in a normal monopoly.
Figure 6.2 Consumer and monopolist surplus.
Figure 6.3 Price mechanism in a natural monopoly.
Figure 6.4 Profit maximization in monopolistic competition.
Figure 6.5 Short-run profit maximization in monopolistic competition.
Figure 6.6 Long-run equilibrium in monopolistic competition.
Figure 6.7 Price mechanism in perfect and monopolistic competition.
Figure 6.8 Marginal value product curve for labor under profit maximization....
Figure 6.9 Monopsonistic pricing.
Chapter 7
Figure 7.1 Consumer and factor markets.
Figure 7.2 Utility maximizing choice of work hours.
Figure 7.3 Shift in work attitudes.
Figure 7.4 Influence of wage raise on work time.
Figure 7.5 Plausible labour demand curve.
Figure 7.6 Neoclassical savings function of households.
Figure 7.7 Demand of a factor of production
Figure 7.8 Labor demand of a profit maximizing firm in perfectly competitive...
Figure 7.9 Supply and demand in factor markets.
Chapter 8
Figure 8.1 Information situations.
Figure 8.2 Utility and marginal utility functions.
Figure 8.3 Risk aversion.
Figure 8.4 Risk seeking.
Figure 8.5 Attractiveness of insurance.
Figure 8.6 Impact of transaction costs for supply and demand.
Figure 8.7 Satisficing versus utility maximizing choice.
Figure 8.8 Decision-making based on satisficing.
Figure 8.9 Hidden characteristics and adverse selection.
Figure 8.10 Hidden action and moral hazard.
Chapter 9
Figure 9.1 Prisoners' dilemma.
Figure 9.2 Classification of games in game theory.
Figure 9.3 Classification of auctions regarding value.
Figure 9.4 Maximum yield in an auction.
Figure 9.5 Results of an English auction.
Figure 9.6 Results of a sealed-bid auction in competitive bidding.
Figure 9.7 Pricing in competitive bidding.
Chapter 10
Figure 10.1 Classification of economic activities.
Figure 10.2 Classification by NACE.
Figure 10.3 Actors in the construction market.
Figure 10.4 Market demand in Germany 2020.
Figure 10.5 Market demand in Germany 2016.
Figure 10.6 Market demand in the 27 EU countries 2020.
Figure 10.7 Market demand according to economic development status.
Figure 10.8 Construction firm structure and turnover in Germany 2020.
Chapter 11
Figure 11.1 The construction process as wrongly but funnily depicted in a ca...
Figure 11.2 Types of owners.
Figure 11.3 The entity owner.
Figure 11.4 Project phases.
Figure 11.5 Basic contractual options for the owner.
Figure 11.6 Construction market for a singular project.
Chapter 12
Figure 12.1 Contractor as an entity.
Figure 12.2 Owner as employer.
Figure 12.3 International construction joint venture.
Figure 12.4 Contractor's organization.
Figure 12.5 Cost minimization through technology.
Figure 12.6 Equity ratio and profits for structural works in Germany.
Figure 12.7 Expansion path for contractors.
Figure 12.8 Information and prospects of the contractor negotiating a contra...
Figure 12.9 Integration of partial plans during bidding.
Figure 12.10 Markup pricing in construction.
Figure 12.11 Production process in the construction sector.
Figure 12.12 Detailed production process in the construction sector.
Figure 12.13 Production and complexity for construction.
Figure 12.14 Schematic process in the precast yard in BangNa.
Figure 12.15 Range of substitutability.
Figure 12.16 Type A production function with two variable inputs.
Figure 12.17 Cost curves for a production function of type A.
Figure 12.18 Contracts and average productivity for a contractor.
Figure 12.19 Cost curves for contractors.
Chapter 13
Figure 13.1 Heterogenous forms of buildings in the skyline of Dubai.
Figure 13.2 Construction goods as transitional performance bundles.
Figure 13.3 Characterization of construction investment goods.
Figure 13.4 Five-dimensional typology of services and applications.
Figure 13.5 Conceptualization of construction projects.
Figure 13.6 R-tasks with generic resources.
Figure 13.7 I-tasks with generic resources.
Figure 13.8 S-tasks with specific resources.
Figure 13.9 Market entry and required resources.
Figure 13.10 Optimum firm size based on long-run average cost curve.
Figure 13.11 Strategic planning.
Chapter 14
Figure 14.1 Construction supply of a single contractor over a year.
Figure 14.2 Turnover of one contractor from one contract.
Figure 14.3 Concentration of construction activities in Bremen, Germany.
Figure 14.4 Competitive forces in owner markets.
Figure 14.5 Competitive forces in contractor markets.
Figure 14.6 Porter's five competitive forces forming the construction sector...
Figure 14.7 Shift in construction demand in perfectly competitive constructi...
Figure 14.8 Quantity and price changes in the German construction market 199...
Figure 14.9 Model of entry barriers (de Valence).
Figure 14.10 Entry and exit barriers.
Figure 14.11 Construction investment and GDP, Germany 1990–2019.
Figure 14.12 Number of firms for construction works in Germany, 1991–2019.
Figure 14.13 Number of firms >20 employees for construction and finishing wo...
Figure 14.14 Changes of labor productivity during the business cycle in Germ...
Figure 14.15 Functioning of the fragmentation/consolidation process.
Figure 14.16 Business cycle, firm size, and construction volume in Germany....
Figure 14.17 Insolvencies in the German construction industry (structural wo...
Figure 14.18 Comparison of insolvencies in manufacturing and construction pe...
Figure 14.19 Startups in the construction sector in Germany.
Figure 14.20 Comparison of orders of all structural contractors and turnover...
Chapter 15
Figure 15.1 Phases of contracting.
Figure 15.2 Development, production, and sale of an exchange good.
Figure 15.3 Development, production, and handover of a contract good.
Figure 15.4 Market demand by owner 1 for office building A.
Figure 15.5 Actual and potential market supply contractor X.
Figure 15.6 Consequences of incomplete contracts.
Figure 15.7 Incentives in procurement systems.
Figure 15.8 Marginal cost concept in manufacturing and construction projects...
Figure 15.9 Result of auctions in construction markets.
Figure 15.10 Auction designs for selling a good.
Figure 15.11 Auction designs for buying a good.
Figure 15.12 Outcomes of sealed-bid auctions and number of bidders.
Figure 15.13 Influence of asymmetric information on price.
Figure 15.14 Technological change for a production function of Type A.
Figure 15.15 Typical monopsony.
Figure 15.16 Monopsony outcome in construction.
Figure 15.17 Matching owners and contractors.
Figure 15.18 Negotiation possibilities with default option.
Figure 15.19 Nash solution to the zero-sum game.
Figure 15.20 Bargaining solution in construction contract negotiations.
Figure 15.21 Bargaining possibilities through value engineering.
Chapter 16
Figure 16.1 Optimal solution to externalities with assigned property right....
Figure 16.2 Suboptimal solution
Q
market
for an externality.
Figure 16.3 Solution with government limit.
Figure 16.4 Tacit collusion in the beggar's market.
Figure 16.5 Incentives for and mechanics of collusion.
Chapter 17
Figure 17.1 Government expenditures in percent of GDP, 2019 or 2020.
Figure 17.2 Construction spending in Germany 2019.
Figure 17.3 Influence of an excise tax on price and quantity.
Figure 17.4 Tax distribution in case of inelastic demand and elastic supply ...
Figure 17.5 Tax revenue and deadweight loss.
Figure 17.6 Effect of a subsidy to demand.
Figure 17.7 Market results before the introduction of rent controls.
Figure 17.8 Market results after introduction of rent controls.
Figure 17.9 Equilibrium of the money market.
Figure 17.10 Effect of an increase in money supply.
Figure 17.11 Monetary policy and inflation.
Chapter 18
Figure 18.1 Satisfaction by viewing a lighthouse.
Figure 18.2 Optimal production of public goods.
Figure 18.3 Supply and demand of a public good.
Figure 18.4 Involvement of the private sector in public works.
Chapter 19
Figure 19.1 Decision-making, power, and information during a construction pr...
Figure 19.2 Outcomes of construction goods, qualities, and opportunistic beh...
Figure 19.3 Construction market outcomes.
Figure 19.4 Cause and effect in contracting – inefficient markets.
Guide
Cover
Table of Contents
Title Page
Copyright
Foreword by Gerard de Valence
Preface
Begin Reading
Index
End User License Agreement
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Construction Microeconomics
Christian Brockmann
University of UtahSalt Lake City, USA
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Library of Congress Cataloging-in-Publication Data
Names: Brockmann, Christian, 1954- author.
Title: Construction microeconomics / Christian Brockmann.
Description: Hoboken, NJ : Wiley-Blackwell, 2023. | Includes index.
Identifiers: LCCN 2022050327 (print) | LCCN 2022050328 (ebook) | ISBN 9781119828785 (cloth) | ISBN 9781119831914 (adobe pdf) | ISBN 9781119831921 (epub)
Subjects: LCSH: Contractors’ operations. | Construction industry—Economic aspects.
Classification: LCC TA210 .B76 2023 (print) | LCC TA210 (ebook) | DDC 692/.8—dc23/eng/20221026
LC record available at https://lccn.loc.gov/2022050327
LC ebook record available at https://lccn.loc.gov/2022050328
Cover Design: WileyCover Image: © joe daniel price/Getty Images
Foreword by Gerard de Valence
Construction economics (CE) is the application of economic theory and techniques to the construction industry. However, because of the distinctive characteristics of the organization of construction processes, the structure of construction markets, and the management of construction firms, this is not a straightforward process.
The physical nature of the product, the variability of demand, the method of price determination by auction, and the contractual relationships between owners, contractors, and suppliers, requires adaptation of economic theory to adequately reflect the industry.
Therefore, CE combines industry-specific knowledge of the construction industry and its characteristics with economic theory to analyze and understand industry structure and dynamics. Christian Brockmann’s knowledge of construction is based on his experience in designing and managing projects over a period of 40 years, including several megaprojects, and this experience deeply informs his book. Construction Microeconomics is an important milestone in the theoretical analysis of the construction process, the construction industry, and construction firms.
This is the first book to focus on microeconomic aspects of construction, and that focus allows an extended discussion of topics beyond those found in previous CE books. Microeconomics studies the interaction of producers and consumers of goods and services in specific industries and markets, and the tools and techniques used are well-known. In a simple exchange market, where the transaction is complete, the analysis of demand and supply is relatively straightforward, but construction markets are not like that. The book introduces the idea of contract goods that are delivered over time and priced by bids from contractors, and the analysis of how those characteristic features of construction affect the behavior of owners and contractors in Construction Microeconomics is both original and insightful.
Microeconomic theory can be applied to a range of issues found in the procurement and contracting of projects. Topics such as competitive and monopolistic or monopsonistic markets, auction theory, game theory, and buyer and supplier power are relevant, as is the economics of contracts. Other related topics are production theory and the theory of the firm, transaction cost economics and its application to property rights, agency theory, moral hazard, and incentives.
Among construction economists there are different views on construction markets, the behavior of firms, and the nature of construction products and processes. In particular, bidding for work in auctions and contracting under uncertainty for owners who are risk averse raises complex issues around marginal costs and prices, incentives and behavior, and information asymmetry and bargaining power that this book discusses in detail, drawing on developments in industry economics to support the points made and the approach taken.
The library of CE books has been growing recently, with the publication of several edited volumes of research that cover a wide range of topics. A book that focuses on the operation and organization of construction from a microeconomic perspective is a welcome addition, building on previous work and bringing a new perspective to issues and topics that are fundamental to CE. Christian Brockmann has written a readable, accessible book that will be of interest not just to academic researchers but to industry and policy makers as well, and his Construction Microeconomics is a significant contribution to the development of CE.
Gerard de Valence
Kurmond, July 2022
Preface
You are stepping out onto the observation deck of the Empire State Building in Manhattan, New York, and feel overwhelmed by the dazzling array of buildings all around you. Many high-rises are scratching the sky next to you. Others are of medium size somewhere below, and as you strain your eyes, you see a few buildings that seem to be just one story high (Figure 0.1).
To the south is the Flatiron Building, which was one of the tallest buildings at its opening in 1902. Not far beyond and further south is One World Trade Center, built at the site of the terrorist attacks of 9/11. You know that Wall Street with the New York Stock Exchange is close by, but you cannot see it. A little bit to the west and far away, Lady Liberty holds high the flame of freedom. Quite a way out, you can distinguish the Verrazzano-Narrows Bridge.
Turning east, there is the sea of buildings constituting Brooklyn and Queens; in between lie the Brooklyn bridge as a historical landmark and the complex of the UN headquarters. The planes on the horizon are starting from or landing at JFK International Airport.
Up north, Central Park is settled among other groups of skyscrapers, some slender as a pencil. Recognizable to you is 432 Park Avenue and One57. Your eye is by now used to all the skyscrapers, but these two seem to be rising from a plot of land not larger than the size of a towel. Central Park is clearly delineated by concrete, stone, steel, and glass. Millions of people live in the confined space of New York City and every single person expects electricity when switching on a light, fresh water when turning the faucet, a connection when dialing a telephone number, and gas when preparing a meal; the internet provides music and information all the time. You know that all these utility lines are below the streets, underground together with the metro, invisible from the Empire State Building.
What might Manhattan have looked like some 250 years ago at the time of the Declaration of Independence? How did it look in 1609, when the Dutch started the first European settlement, or in 1524, when Giovanni da Verrazzano sailed into the natural harbor to meet the native Indians, the Lenape?
What engineering and what economic forces were at work in the transition from pastures to the built environment of today – what knowledge and what innovation? Surely, the expansion of our understanding in civil engineering design and construction was necessary, but without the motivation of owners, designers, and contractors, nobody would have raised a finger. Without financing from banks on Wall Street, without investment from the government, not much would have been possible. Lady Liberty invited the huddled masses to come to New York and provide the labor force required for construction. She also symbolizes democracy and capitalism as institutions framing all economic activities over the 400 years of building growth in Manhattan. In the beginning, land was freely available, while its scarcity today exacts the construction of pencil towers. Over this period, the border between the natural and the built environment shifted decisively toward the latter. The water and air quality deteriorated at the same time, and an increase in CO2 emissions into the atmosphere affected the climate.
Figure 0.1 Looking south from the observation deck of the Empire State Building.
Source: Arthur/Adobe Stock.
If these questions and problems are relevant to you, then this book is for you. It addresses economic problems that you will face as an interested individual or as a contributor to the built environment. It focuses on owners who initiate construction projects and on contractors who constitute the construction sector that transforms ideas and plans into infrastructure and buildings. Owners must at least provide an idea, land, and financial resources. Next, they can ask designers, project managers, quantity surveyors, lawyers, insurers, and bankers to develop the first idea into plans and a contract. All this requires institutions and functioning markets and a contractor for implementation. The contractor combines inputs such as land, labor, materials, and equipment to produce the building or infrastructure.
Economics consists of two major parts, micro- and macroeconomics. With the help of microeconomic theory, we try to answer questions about decision-making by single entities (individuals, firms, or parts of the government). Some entities try to maximize their benefits as consumers, others try to optimize their profits as producers. Together, they constitute the demand and supply side of a market. What happens on construction markets depends most of all on the decisions by owners and contractors. Microeconomics focuses on quantity and price as a result of decision-making by consumers and producers.
Macroeconomics relies on aggregated data from national or supranational accounts. Instead of the price for a specific one-family house, the average price of comparable one-family houses becomes of interest. The main goals of macroeconomics are economic growth, full employment, and limited inflation. To achieve these goals, societies decide on economic institutions between the extremes of pure market or pure planned economies. Governments use fiscal (tax) and monetary policies as tools.
A monograph with the title Construction Microeconomics unsurprisingly concentrates on microeconomics and neglects many macroeconomic aspects. This sharpens the focus and allows presenting the theories and applications with greater depths. Most of all, it provides the space to develop microeconomic theory for the construction sector.
There are many excellent textbooks and monographs on microeconomics, some written by Nobel Prize–winning authors. The wish to add to this body of knowledge something meaningful would be presumptuous, and I refrain from it. However, paradigmatic for this literature are manufacturing industries, and the question arises whether we can use the same concepts in the construction sector. My personal experience is negative. While working as construction project manager some 35 years ago, I felt a keen lack of basic economic knowledge in my training as civil engineer. I started to study economics besides work, and the idea was to learn in the evening and to apply the concepts in the morning. My enthusiasm for economics in the evening was as great as my frustration in the morning: The concepts from manufacturing did not fit into the framework of construction. Among the main reasons are singular construction goods versus standardized manufacturing goods; movable factories instead of stationary ones; labor intensity in place of automation; and much higher uncertainty due to project organization in construction compared with process organization in manufacturing. The days of the Ford Model T (Tin Lizzie) are long passed in manufacturing as it moves into the direction of customization, while construction moves toward standardization. However, there remains a sizable and insurmountable gap.
A gap calls for a bridge, and this is what I aim to achieve with Construction Microeconomics. I will use general economics as a quarry to extract building material for the bridge, and I will use my skills as a civil engineer and project manager, as well as my knowledge as an economist, to construct it. As a result, construction will meet microeconomics.
While this is a textbook, it also contains some new thoughts based on research. Otherwise, I could not possibly hope to build the bridge. Colleagues have provided books on construction economics (Chapter 1), but a book specializing in construction microeconomics has not been available.
Economic reasoning, as presented in textbooks or as impersonated by winners of the Nobel Memorial Prize in Economics, is deeply embedded in Western thinking with its historical roots in Europe (Pribram 1983). While I hope that all readers will be critical, I invite those from other cultural backgrounds to be even more so. Microeconomic concepts are adopted around the world, but there will be differences in what is optimal. Here is a gap that I cannot even dream to bridge.
I will treat economics as a separate subject in the coming chapters, although I am fully aware that this cuts important ties to other domains which exert a strong influence, and vice versa. We are living on this planet, and we live off its natural resources. The environment provides our food, our clothes, our built environment, the many goods we use daily, as well as the air we breathe and the water we drink. When we produce goods by transforming inputs into outputs of higher value, we use the natural environment as a source and as a sink. The greater the population of the world, the more resources we take from the environment and the more waste we send back to it.
Figure 0.2 Economic embeddedness.
Economic theory is also embedded in ongoing philosophical discussions. Especially pertinent are the topics of ontology, epistemology, philosophy of the mind, and ethics. The questions and answers arising from these discussions form the way we perceive the world and how we construct economic models. Religion informs our thinking at the same time. Religion, ethics, and perception are not globally uniform.
Another domain of influence is the history of economic thought itself. What I will present to you was developed over many centuries by many great thinkers. Some of the conflicts during these centuries of evolutions and revolutions still lead to different opinions today. Thought and action developed around the world in different ways throughout history forming different cultures, beliefs, institutions, and policies.
Politics, law, and economics strongly influence each other. What we today call economics was addressed by our forefathers as political economy, stressing the relationship between the two subjects. Fundamental to all economics are decisions about property rights and their definition is the task of law.
Psychology plays an ever-larger role in developing economic models because the actors in economic models are humans. Actual human behavior determines economic outcomes. Thaler (2015) thus distinguishes between humans and econs, with econs being part of many economic models and humans living in the real world and populating the models of behavioral economics. Unfortunately, most models that economists have developed over the centuries are based on econs. For lack of something better, I will often have to stick with them.
The idea that Figure 0.2 shall convey is that we are all living in this one world; we have developed as a species over time until today. In the process, we have transformed the natural environment and we have developed ourselves as well. As humans, we try to make sense by advancing ideas and theories to understand our world. Driven by cognitive development, we create and change our institutions, politics, and laws. Institutions contain culture, regulation, and norms. Psychology describes the minds that we use as a tool for understanding and action. Economics is embedded in all these domains, is impacted by them and impacts them in turn. This is how I see economics.
Figure 0.3 Economics cannot be modeled as a machine.
Source: Kaihsu Tai/Wikimedia Commons/Public domain”.
Other scholars describe economics as a separate entity with causality at its core. An extreme view is that of a mechanistic model. One example is the partial model of the monetary flow in an economy by Phillips from 1949. He built a machine called Moniac – monetary national income analogue computer. Figure 0.3 shows a model of the machine: Everything in this model is determined. This is how I do not see economics.
For the treatment of microeconomics in this text, I will neglect to a large degree the natural, cultural, and cognitive environment, as well as more specific institutions, policies, and laws. Cutting all these links is almost inexcusable. However, it has the advantage of concentrating on microeconomics, and it is up to us to use that advanced knowledge by reconnecting it with all the other aspects. Concentration, not importance, forces me to omission; the embeddedness of economics in the overall environment is very important!
As an excuse, I can offer that I will link microeconomics and construction. On the one hand, this is an enlargement of focus; on the other hand, it is a further specialization. Construction microeconomics remains just one element of our world, and this is the building block that I offer to you. I feel it has its own beauty and purpose; yet, it remains just a building block. I am sorry, dear reader, but I must put on your shoulders the burden to work through this book and to connect any new economic understanding with your own life. Maybe you share my appreciation of the complexity and diversity of our lives as human beings, as economists, engineers, and managers. Diversity allows for different receptions of my text as each reader will place the information and arguments in her or his own context.
References
Pribram, K. (1983).
A History of Economic Reasoning
. Baltimore: Johns Hopkins University Press.
Thaler, R. (2015).
Misbehaving: The Making of Behavioural Economics
. New York: Norton.
