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Contents

Section 1 Resources

Section 2 Scarcity and Price

Section 3 Identifying Resources
             
 

Description:  The purpose of this unit is to enable you to identify the resources required for a project and evaluate the impact of scarcity on price determination.

Author:  Gates MacBain Associates


Section 1  Resources




Aims and Objectives

At the end of this section you should be able to:

  • Discus the resources that are required in order for the production process to take place.


In order to produce items a number of resources will be required.  The organisation of these resources to produce a product is known as production. 

Production is the sequence of operations whereby certain items or materials are input into a process, at the end of which products emerge as output.  


Factors of Production - Resources 

In order to produce commodities a number of resources or factors of production are required, these are:
  • Land
  • Labour
  • Capital
  • Entrepreneurial Function

Land 

This is the natural resources used in the production process and includes: 
  • Land – farmland, woodland, storage areas
  • Water – water courses, lakes, the sea
  • Natural resources – minerals, fuels, chemicals.  This would include fish and timber.
The type of land resources will dictate, to a certain extent, the type of industry and society that exists.  Consider the tropical rain forest of South America, Oil resources of the Middle East and fertile land of North America.  A farming region will have a low population, an industrial region a high population. Land will be required in order to produce a building. Other resources will then be needed to enable a building to be assembled on the land which will become the product. 


Labour 

Labour as a factor of production means not only those who produce products i.e. a bricklayer, but also those who provide a service i.e. the architect. 

A number of demographic factors need to be taken into account when considering labour as these will have an effect on not only the ability to produce the product but also the costs, these are: 
  • Effects of migration
  • Age distribution – the average age of the UK population is increasing
  • Policies on retirement
  • Geographical distribution of the work force
  • Sex structure of population – suitability and willingness to do certain jobs
  • Skills surpluses and shortages
  • Unemployment levels
 
Capital 

This, in economics, does not just mean money, it also means the raw materials, plant, machinery or any other commodity which helps to produce further goods or services. 

Capital would include, in the construction process, all materials, equipment, site huts and office furniture.  It would also include the factory premises used to i.e. make bricks. 


Entrepreneurial Function  

This is the risk taking and organising element of production and would include the following:  
  • Discovery, recognition and development of profit making opportunities
  • Providing or acquiring funds for an enterprise
  • Organising the other factors in order to make a profit
  • Supervision of production

Use of Resources   

Scarce resources need to be allocated between competing alternative uses.  As production takes place, the goods created – known as economic goods – use the resources.  The resources have costs associated with them: These may be:  
  • Financial costs – these involve the money spent obtaining the resources and converting them into a product.
  • Opportunity costs – this means the resources allocated to one use cannot simultaneously be used for something else, i.e. a piece of land used for the construction of an office block cannot be used at the same time for housing.  This can be changed later when the office block is demolished and the land used for something else.  Opportunity cost is therefore concerned with the loss of the value of the next best use at any particular time. Opportunity costs are important when the government considers how to share its taxation revenue between defence, education, health and other competing uses.

Production 

Production can be classified under three headings: 
  • Primary – Extraction industries – forestry, fishing, farming, quarrying.  This deals with obtaining the raw materials.
  • Secondary – Manufacturing and Construction industries – deals with converting the raw materials into a product.
  • Tertiary – Commercial services such as banking, finance, retailing.  Deals with support services.
 



Publications

  • Manser, J, (2002),  Economics a foundation course for the built environment, London: Spons



Self-Assessment Task

  • State the type of resources that will be needed in order to carry out a project for your company and explain the purpose of each type of resource.




Section 2  Scarcity and Price




Aims and Objectives

At the end of this section you should be able to:
  • Explain the way that price is fixed and the factors which effect it.


In order to understand the effect that scarcity has on the price it is essential that you understand the basic concepts of economics which relates to supply, demand and price. If you have not studied constructionsite unit Economic Principles  as part of your course you should read through that.  


Demand 

An item or service will only be produced if there is a demand for it and if a producer can make a profit by producing it. Demand refers to a desire, or want backed by the ability and willingness to pay an appropriate price for the satisfaction of that desire or want.  


Factors Which Affect Demand 
  • Market Considerations.   Is the population growing or declining in given areas. What is their disposable income, the state of the economy, wages, taxation, employment and the availability of finance? What are the reasons for purchasing?
  • Company and Product Considerations. What is the company's and products reputation? How well does it advertise.
  • Demand for other Products. What competition is there in price, quality, perceived value, aesthetic appeal? Do we buy a new house or a second hand one, or do we rent.)

Demand is linked to price in that:      
      
As price increases, quantity demanded falls            
As price decreases, quantity demanded rises. 

This can be shown by a demand curve, which shows the consumer behaviour in a single market. 

Demand_Curve













Demand Curve  


The curve is constructed from the individual demand curves for all consumers in the market. The gradient of the curves fall, which falls from left to right, depends on the elasticity of demand.  

The downward slope of the curve confirms that consumers demand more of the item as the price falls. 

In the graph shown it can be seen that at a price of £10 there is a requirement for 30,000 items. If the price falls to £5 there will be a requirement for 40,000 items. An increase in price to £15 will reduce the demand to 20,000. 

The movement along the demand curve is due solely to price changes in the  product and is referred to as changes in quantity demanded. The demand curve itself does not change position on the graph.    Shifts in the Demand Curve Demand can change for reasons other than change in price. This will cause a shift in the demand curve. Here the demand curve will move to either the right (causing an increase in demand D2) or to the left (resulting in a decrease in demand D3).     

Shifts_in_Demand_Curve














Shifts in Demand Curve     


Reasons for a Shift in the Demand Curve  
  • Taste or fashion.  Health related information can affect life styles, also clothing, mountain bikes.
  • Price of substitutes.  Most items have close substitutes. An increase in the price of one item is likely to increase the demand for its substitute. The demand curve shifts to the right even though its price has not altered. (Shortage of plastic due to oil crises)
  • Jointly demanded products (vehicle & petrol, hardware & software)
  • Income.  For demand to be effective it must be backed by money. If real disposable incomes are increased the consumer can afford to pay more for the item.
  • Population.  Changes in population, age and geographical situation influences demand, e.g. ageing population increases demand for sheltered housing and healthcare.
  • Innovation.  New goods effect the demand for current products e.g. CDs replacing vinyl LP's.

Elasticity of Demand 

Elasticity of demand is the degree of responsiveness of the movement of demand due to movement in price. 

Demand is said to be elastic when a relatively small variation in price produces a marked variation in the amount demanded.  


Supply 

Supply may be price driven or demand driven. The more the price of an item rises the more items the producer will want to supply. Therefore:             

As price increases, quantity supplied rises            
As price decreases, quantity supplied falls. 

Higher prices increase profits so firms will increase output and new firms will begin to produce the product. 

The supply curve is therefore, opposite to that of the demand curve..      


Supply_curve













Supply Curve    
 

Shifts in the Supply Curve 

The supply curve will shift due to: 
  • Change in production costs. This will affect the firm's profit margins and supply levels. New machinery can reduce time of production and labour costs increasing productivity.
  • Competition.  This should lead to increased efficiency in use of resources and higher output at given cost levels resulting in increased production and supply.
  • Other products.  Where production produces a number of products, e.g. petrol and oils, an increase in the production of one product will result in the increase in supply of all jointly produced products.
  • Government policies.  The levels of taxation affect total costs and thus supply levels. Changes in the law may require new methods of production or increased costs i.e. clean air legislation.  Government can impose subsidies or quotas in order to influence prices.
   
Elasticity of Supply 

Elasticity of supply is determined mainly by the ease with which producers can change their level of production. The construction of office blocks requires investment months or even years ahead of actual production. This makes it difficult to alter production, which means that they are inelastic. Products that can be stopped or changed at short notice are elastic.   


Pricing 

A price is a means of assessing value and/or making comparisons of value, like money it has no intrinsic value but is a means of measuring value. 

The method of pricing will depend on the product and the demand for the product. 

Pricing must take into account not only the number of variables but also that they are continually changing.   


Market Price 

The market, or equilibrium, price is established when demand equals supply.If consumers demand 20,000 units and the producer supplies 40,000 a surplus is created which will cause the price to fall. This will then lead to an increased demand which will reduce the supply establishing an equilibrium (state of rest) price. 

If the price were set below the equilibrium price, shortages would result due to demand exceeding supply. This would encourage firms to increase prices and supply until equilibrium was restored. If prices are fixed through decisions made by the European Community, surpluses may occur. Conversely, shortages may result in rationing or the black market may result.  


Methods of Pricing 
  • Competition Based.  This is based on the going rate, what competitors are charging. Prices may then be set in line with, above or below.
  • Cost Based.  This is the cost of producing the item with a percentage for profit added on.
  • Demand Based.  The greater the demand and smaller the supply, the more you can charge. You need to be able to assess demand and know what the market will stand.
In housing it can be a combination of all three methods, though perceived value should also be considered, here the erection of a garage costing £2000 can increase the price of a house by £5000.  


Pricing Strategies 

As well as the methods of pricing, there are a number of strategies which can be adopted, these include: 
  • Market Penetration.  Low prices are set to penetrate or corner the market. This policy is only valid if the market is very price sensitive, or if production costs fall with increased volume. 
  • Short‑term Profit Maximisation.  Make as much profit as possible when there is no competition, prices will fall back later.
  • Product Line Pricing.  The use of a loss leader in retailing to bring people in to buy high profit goods.
  • Variable Pricing.  Different prices set for different times i.e. holidays are cheaper off season, off peak electricity. Encourages people to buy in a slack period.

Changes in Price 

This can affect:
  • Volume of sales.
  • Marginal Costs.
  • Customer’s perception of value.
  • Competitor’s reaction.
  • Price elasticity.
If prices fall people may think:
  • The product is faulty or inferior.
  • The company has financial difficulties.
  • Further reductions may take place.
Prices will fall if there is:
  • Excess capacity.
  • Falling share of the market.
  • Aggressive selling.                                                         
Prices will rise if there is:              
  • Strong demand.
  • Inflation.
  • Lack of competition.

Many people believe that higher price means higher quality  "You only get what you pay for", so some firms price for this. 

Sometimes pricing is aimed for a particular group i.e. working class, yet the product becomes socially acceptable to all e.g. the mini car. 

Reduction in price can be disguised by given discounts or including extras i.e. carpets, legal fees etc. though a discount is usually a payment for a service i.e. cash, purchasing within a certain time.  Alternatively special offers dressed as promotional offers can be used. 




Constructionsite Units



Self-Assessment Task

  • Explain the factors which will need to be considered by your company prior to setting a price for a contract.





Section 3  Identifying Resources




Aims and Objectives

At the end of this section you should be able to:
  • State how a company identifies the resources that are required for a contract.


Prior to any work being commenced it will be necessary to determine the resources that are needed to enable the work to be completed. In order to determine the requirements a number of procedures are carried. These involve determining the finance required which involves assessing the work and what is required to enable the work to be carried out. The way the finance is determined is by a Financial Appraisal, this is look at in the constructionsite unit Financial Appraisal, Procurement and Payments (30).  The requirement for the resources of Materials, Labour, machinery/plant will be established by assessing the work through the drawings, specification and programme of work. The production of a programme will enable resources to be placed against each activity; this is looked at in the constructionsite unit Planning & Control (35) which should be consulted to gain an understanding of how resources are identified.



Publications

  • Cooke, B & Williams, P (2009) Construction planning, programming and control 3rd Edn. Wiley-Blackwell: Oxford (Part B)



Constructionsite Units


Self-Assessment Task

  • Explain the way in which resources are determined by your company for a contract.





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