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Part B :ECONOMICS

Definition of Economics, Economic laws, Economic goods, utility, value, price


and wealth. Economic organization of society. Consumption, wants, their
characteristics and laws based upon them. Standard of living, market value,
opportunity cost, the laws of diminishing, increasing and constant returns. Urban
land values, land utilization, factors involved in development of urban land. Cost
and cost indices preliminary for building. Concepts of life cycle costing with
reference to buildings. Time value of money-present worth and inflation.
Sources of finance for buildings.

References:
1) “Sociology “ by Neil J Smelser
2) “Urban Economics” by Warner Z Hirsch
Week8 :UNIT 7
Definition of Economics, Economic laws, Economic goods,
utility, value, price and wealth, Demand and Supply
Week9 :UNIT 8
Economic organization of society. Consumption, wants, their
characteristics and laws based upon them.
Week10 :UNIT 9
Standard of living, market value, opportunity cost, the laws of
diminishing, increasing and constant returns.
Week11 :UNIT 10
Urban land values, land utilization, factors involved in
development of urban land.
Week12 :UNIT 11
Cost and cost indices, preliminary for building.
Week13 :UNIT 12 Concepts of life cycle costing with reference
to buildings. Time value of money-present worth and inflation.
Sources of finance for buildings.
UNIT 7
Definition of Economics,
Economic Laws, Economic
goods, Utility, Value, Price
and Wealth.

11-Apr-19 A ppt on Economics 3


Economics is the social science that analyzes the
production, distribution, and consumption of goods
and services. The term economics comes from the
Ancient Greek οἰκονομία (oikonomia, "management
of a household, administration") from οἶκος (oikos,
"house") + νόμος (nomos, "custom" or "law"), hence
"rules of the house(hold)". Current economic models
emerged from the broader field of political economy
in the late 19th century. A primary stimulus for the
development of modern economics was the desire
to use an empirical approach more akin to the
physical sciences.
Definition of Economics

 Economics is a social science that studies


human behavior and institutional
arrangements in societies that influence
the processes by which relatively scarce
resources are allocated to alternative uses
The Study of Economics

 Economics is the study of


how individuals and societies
choose to use the scarce
resources that nature and
previous generations have
provided.
Economics as a Social Science

Human behavior is influenced by a matrix


of complex forces :
 Psychology
 Sociology
 Anthropology
 Economics
 Political Science
 Religion, ...
Objectives

The objective is the goal or desired outcome of a choice

 Individuals may try to maximize utility given the constraints of


income, time, prices, etc.
 Firms may have objectives such as the maximization of profits,
sales, market share, etc. or the minimization of costs per unit
 Social objective, maximize the well being of the members of
society
•Three basic questions must be answered in order to understand an
economic system:
– What gets produced?
THE ECONOMIC PROBLEM:
– How is it produced?
– SCARCITY
Who AND CHOICE
gets what is produced?
WHAT IS ECONOMICS?
Factors of production
The resources used to produce goods and services; also known as production
inputs.
• Natural resources/Land
Resources provided by nature and used to produce goods and services.

• Labour
The physical and mental effort people use to produce goods and services.

• Human capital
The knowledge and skills acquired by a worker through education and experience.

• Physical capital & Financial Capital


The stock of equipment, machines, structures, and infrastructure that is used
to produce goods and services.
Input of funds

• Entrepreneurship
The effort used to coordinate the factors of production—natural resources,
labor, physical capital, and human capital—to produce and sell products.
What is economics..?
Economics is one of the most fascinating
subjects. It is one of the oldest disciplines
among the humanities. It is described as
the queen among all social sciences. It
affects the day-to-day life of all people
either directly or indirectly. Hence the
knowledge of economics is required to
one and all..

11-Apr-19 A ppt on Economics 11


Briefing about economics..
Economic activity is the one which helps the people to
make economic gains measured in terms of money.

Economic problem is essentially a problem arising


from the necessity of choice. Scarcity of means to
satisfy our contending wants is the characteristic of an
economic problem.

In general economics is the “Science which deals with


the rational allocation, proper exploitation, better
utilisation and scientific management of all kinds of
resources- Natural, Human, Capital (both scare and
abundant) in order to promote the over all economic
welfare of the people in a given time frame”.
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Reasons for an economic
problem..
An economic problem arises on
account of the following reasons:

 Unlimited wants.
 Limited resources.
 Alternative applicability of resources.
 The problem of choice.

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Economics as a Science of Wealth : Classical View:
Definition of Economics By Adam Smith:

There is no one definition of Economics which has a general


acceptance. The formal roots of the scientific framework of
economics can be traced back to classical economists. The
pioneers of the science of economics defined economics as
the science of wealth.

Adam Smith (1723 -1790), the founder of economics,


described it as a body of knowledge which relates to wealth.
Accordingly to him if a nation has larger amount of wealth, it
can help in achieving its betterment. He defined economics
as:
“The study of nature and causes of generating of
wealth of a nation”.
Economics as a Science of Material Welfare :
Neo-Classical View:

Marshall’s Definition of Economics:

The neo-classical school led by Dr. Alfred Marshall gave


economics a respectable place among social sciences.
Dr. Alfred Marshall (1842 - 1924) in his book, 'Principles of
Economics' defined Economics as:

“Study of mankind in the ordinary business of life; it examines


that part of individual and social actions which is closely
connected with the attainment and with the use of material
requisites of well being”.
Economics as a Science of Scarcity and Choice:
Robbins Definition of Economics:
Marshall’s definition of economics remained an article of faith with all
economists from 1830 to 1932. However, with the publication of Robbins
book 'Nature and Significance of Economic Science' (1932), there developed
a fresh controversy in regard to the definition of economics. According to
him:
Firstly, the definition of Economics given by him is superior to that of others
because it does not contain any reference of the term material or welfare.
Secondly, it applies as much to the case of an isolated individual as to the
complicated net working of society. Thirdly, it raises the status of
Economics to that of Science. Fourthly, it makes Economics a positive
science which deals only with facts, It forbids the economists to pass any
value judgment of what is good or bad, right or wrong, etc.
Lionel Robbins claiming his definition Economics precise, scientific and
superior, defines Economics book ‘Nature and Significance of Economics
Science' (Published in 1932):
"A science which studies human behavior as a relationship
between ends and scarce means which have alternative
uses".
Economics as a Science of Growth and Efficiency:

If we define Economics as a science of administration of scarce


resources, then its scope becomes too wide and includes the
whole of economics and not merely that part of it which is
connected with the market price.

Latest/Modern Definition of Economics:


"A science of growth and efficiency".
Economics Problems:

Economic problem of mankind owes its origin to the


fact that human wants are numerous and of
different kinds. The resources to satisfy the
multifarious human wants are limited or scarce.
Scope of Economics:
The scope of economics is the area or boundary of the study of economics. We
answer and analyze the following three main questions:
(i) What is the subject matter of economics?
(ii) What is the nature of economics?
(iii) What are the limitations of economic?
Subject Matter of Economics:
There is a difference of opinion among economists regarding the subject-matter
of economics. According to them, "economics is the study of how man and
society choose with or without money, to employ productive uses to produce
various commodities over time and distribute them for consumption now and in
future among various people and groups of society”.
(ii) Nature of Economics:
The economists are also divided as to Economics is both a science and an art.
Economics is considered as a science because it is a systematic knowledge derived
from observation, study and experimentation. However, the degree of perfection
of economics laws is less compared with the laws of pure sciences.
Is economics a positive science or a normative science?
(iv) Economics is Positive(objective)or Normative(subjective)
Economics, has both theoretical as well as practical side. In other words, it is both
a positive and a normative science.
Methods of Economic Analysis:
An economic theory derives laws or generalizations through two methods:
(1) Deductive Method and (2) Inductive Method.
The deductive method is also named as analytical, abstract or prior
method. The deductive method consists in deriving conclusions from
general truths, takes few general principles and applies them draw
conclusions.
Inductive method which also called empirical method was adopted by
the “Historical School of Economists". It involves the process of
reasoning from particular facts to general principle. This method derives
economic generalizations on the basis of (i) Experimentations (ii)
Observations and (iii) Statistical methods.
Alfred Marshall has rightly remarked:
“Inductive and Deductive methods are both needed for scientific
thought, as the right and left foot are both needed for walking”. We can
apply any of them or both as the situation demands.
Micro and Macro Analysis:
• In recent years, the subject matter of economics is divided into two broad
areas. One of them is called Microeconomics and the other is called
Macroeconomics.
• The distinction/difference between Micro and Macro economics is made
clear below:
• "Microeconomics is the study of specific individual units; particular firms,
particular households, individual prices, wages, individual industries particular
commodities. The microeconomic theory or price theory thus is the study of
individual parts of the economy".
• "Macroeconomics deals with total or big aggregates such as national income,
output and employment, total consumption, aggregate saving and aggregate
investment and the general level of prices".
The micro and macro economics are interdependent. They are
complementary and not conflicting. We cannot put them in water tight
compartments. Both these approaches help us in analyzing the working of the
economy. We should integrate the two approaches for the successful analysis
of the working of economic system. The macro approach should be applied
where aggregate entities are involved and micro approach when individual
cases are to be examined.
WHAT IS ECONOMICS?

Scarcity
The resources we use to produce goods and services are
limited.
Economics
The study of choices when there is scarcity.

Here are some examples of scarcity and the trade-offs


associated with making choices:
• You have a limited amount of time. If you take a part-time
job, each hour on the job means one less hour for study or
play.
• A city has a limited amount of land. If the city uses an acre
of land for a park, it has one less acre for housing, retailers,
or industry.
WHAT IS ECONOMICS..?

 "Economics" is usually defined as


the social science concerned with
analyzing and describing the
production, distribution, and
consumption of wealth.
Introduction to Economics
 A finite world
 Unlimited wants
 Relative Scarcity
 Choices must be made
◦ individual choices
◦ social choices
Finite world
Individuals and Society are
confronted by limited resources :
◦ inputs or factors of production
◦ time
◦ budgets
◦ information / knowledge / technology
Resources
 Typical taxonomy
◦ land / natural resources
◦ labor
◦ Capital
◦ Entrepreneurial ability

 Alternative view
◦ Matter
◦ Energy
◦ Time
◦ Technology
Scarcity
 Because of Scarcity, individuals and
societies must make choices
 All Choices in a finite world have
“Opportunity Costs”
◦ alternative uses of finite resources
◦ Opportunity cost is the value of the next best
alternative sacrificed
◦ Can institutional structure create or increase
scarcity?
Fundamental Economic Questions
 What should be produced?
 How many?
 How should these goods (and services) be
produced?
 When should these goods be produced?
 Who gets the goods (and services) that were
produced?
THE ECONOMIC WAY OF THINKING

Four elements of the economic way of thinking:


1 Use Assumptions to Simplify
Economists use assumptions to make things simpler and focus
attention on what really matters.
2 Isolate Variables—Ceteris Paribus

Economic analysis often involves variables and how they affect one
another.
• Variable
A measure of something that can take on different values.

• Ceteris Paribus
The Latin expression meaning other variables being held
fixed.
THE ECONOMIC WAY OF THINKING
3 Think at the Margin
Economists often consider how a small change in one variable affects another
variable and what impact that has on people’s decision making.
• marginal change
A small, one-unit change in value.

4 Rational People Respond to Incentives


A key assumption of most economic analysis is that people act rationally,
meaning that they act in their own self-interest.
HUMAN WANTS
 Human wants refer to desire arising from physical
or mental necessity followed by means and the
willingness to part this means.
 Wants are unlimited;
complementary;competitive;satiable;alternative;
recurring;result of customs or convention; become
habits; influenced by advertisements; relative; vary in
intensity
 Classified into – Primary wants: necessities,
comforts, luxuries
LAWS OF ECONOMICS
• 1.The law of demand. When the price of a good falls, the quantity
demanded does not fall. Usually, the quantity demanded rises with a fall in
price. Strictly, the law of demand applies to the substitution of cheaper
goods for more expensive goods due to a relative change in price. The law
of demand also applies to the whole economy: when the whole price level
falls, with the amount of money remaining constant, a greater amount of
goods will be purchased.

• 2.The law of supply. When the price of a good rises, the quantity
produced does not fall. Usually, a higher price for a produced good results
in a greater quantity produced. In a free market, the equilibrium price of a
good is that at which the quantity supplied equals the quantity demanded.

• 3.The law of diminishing returns. Given a fixed amount of some input,


when ever more amounts of the variable input are added, eventually, the
marginal product (the last unit's contribution to output) declines.
Frederick Engel

Engel's law. The


proportion of income
spent on food in an
economy is inversely
proportional to the
general welfare of the
society in that economy.
Vilfredo Pareto
• Pareto's law of
distribution. There is
a general tendency for
80 percent of the
consequences to result
from 20 percent of the
causes, which often
applies to property, 80
percent of the wealth
owned by 20 percent
of the population.
Economic laws…
 They are hypothetical in nature.
 They represent economic tendencies expressing what
is likely to happen and not what should happen.
 They are probabilities and not certainties.
 They are general statement of tendencies.
 They are governed by many assumptions.
 They are not permanent in nature.
 They do not have universal applicability.
 They are not exact as the laws of physics.
 They are more exact than the laws of other social
science.
Economic Goods,
Utility, Value,
Price and Wealth.

11-Apr-19 A ppt on Economics 36


Goods & Services

Goods- anything tangible economic product that satisfies a


human want

Services- nonmaterial, intangible and non-transferable


economic goods as distinct from physical commodities

Free goods & economic goods, consumer goods and producer


goods, Durable goods and perishable goods, Private goods and
public goods
Goods And Services
 Economics is concerned with the
production and distribution of goods and
services. Goods would be defined as
anything that anyone wants or needs.
Services would be the performance of any
duties or work for another; helpful or
professional activity. The distribution of
goods and services is referred to as
marketing. The marketing of goods and
services can add almost as much to the
cost as the actual manufacturing of the
goods. Marketing a product refers to the
advertising, and other efforts to promote a
products sale.
 There are many different kinds of
goods. Consumer goods are those
such as food and clothing, that
satisfy human wants or needs.
Producer goods are those such as
raw materials and tools, used to
make consumer goods. Capital
goods are those such machinery,
used in the production of
commodities or producer goods.
 There are untold numbers of
services. A short list would include
educational, health, communication,
transportation, social services.
Goods and Services..
In economics, economic output is
divided into physical goods and
intangible services. Consumption of
goods and services is assumed to
produce utility. It is often used when
referring to a Goods and Services Tax.

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Goods..
Utility characteristics of goods
Goods may increase or decrease their utility directly or indirectly and
may be described as having marginal utility. Some things are useful, but
not scarce enough to have monetary value, such as the Earth's
atmosphere, these are referred to as 'free goods'.

Types of goods
Goods can be defined in a variety of ways, depending on a number of
characteristics. For example, goods have price elasticity. An elastic good is one
for which there are substitute goods; for example, as pen prices rise, the
cross elasticity of demand would result in consumers buying more pencils
instead. An inelastic good is one for which there are few or no substitutes,
such as tickets to major sporting events or original works by famous artists.

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Goods..
Trading of goods
Goods are capable of being physically delivered to a consumer. Goods
that are economic intangibles can only be stored, delivered, and
consumed by means of media.
Goods, both tangibles and intangibles, may involve the transfer of
product ownership to the consumer. Services do not normally involve
transfer of ownership of the service itself, but may involve transfer of
ownership of goods developed by a service provider in the course of
the service. For example, distributing electricity among consumers is a
service provided by an electric utility company.

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Consumption & Utility
 Consumption, process of using various goods
and services for the satisfaction of human
wants. Keynes- consumption the sole end of
all economic activity
 Utility- wants satisfying power of a
commodity or service
 Utility subjective or psychological; relative;
no physical existence; not usefulness; not
satisfaction; related to the price paid;
determines demand
 Form utility, Place utility, Time utility
Utility Value
A subjective assessment of the expected return on an investment at a
given risk. The utility value an investor assigns to a particular investment
depends largely on the investor's risk tolerance. For instance, one investor
may find that expected return X is appropriate for risk level Y, but a second
investor may believe that X is too low for the riskiness
Utility value is a value assigned to an investment on the basis of anticipated
performance. Individual investors use their own methods for
determining utility value of potential investments. People can arrive at
different estimations of utility value depending on how they weight the
variable involved, which is why one person may say that an investment is
sound while another may say just the opposite. When considering a new
investment, taking the time to determine the utility value can be an important
part of the process
Two things are balanced when determining utility value of a prospective investment.
The first is, the expected return. Next, the investor looks at the expected risk.
With this information in mind, the investor can determine the utility value and
decide whether or not the investment is a smart choice.
Price
Price is the quantity of payment or compensation given by one party to
another in return for goods or services.

Price sometimes refers to the quantity of payment requested by a seller of


goods or services, rather than the eventual payment amount. This requested
amount is often called the asking price or selling price, while the actual
payment may be called the transaction price or traded price. Likewise,
the bid price or buying price is the quantity of payment offered by a buyer of
goods or services, although this meaning is more common in asset or
financial markets than in consumer markets.

Economists sometimes define price more generally as the ratio of the


quantities of goods that are exchanged for each other. For example, suppose
two people exchange 5 apples for 2 loaves of bread. Then the price of apples
could be expressed as 2/5 = 0.4 loaves of bread. Likewise, the price of bread
would be 5/2 = 2.5 apples.
However in reality prices are usually quoted and paid in currency. Thus it can
be argued that the most basic and general definition of price is that expressed
in money, and that the exchange ratio between two goods is simply derived
from the two individual prices.
Wealth
Wealth is the abundance of valuable resources or material possessions. An
individual, community, region or country that possesses an abundance of
such possessions or resources is known as wealthy.
The concept of wealth is of significance in all areas of economics,
especially development economics, yet the meaning of wealth is context-
dependent and there is no universally agreed upon definition. Generally,
economists define wealth as "anything of value" which captures both the
subjective nature of the idea and the idea that it is not a fixed or static
concept.
In economics, wealth is the net worth of a person, household, or nation,
that is, the value of all assets owned net of all liabilities owed at a point in
time.
The term may also be used more broadly as referring to the productive
capacity of a society or as a contrast to poverty.

Wealth may be measured in nominal or real values, that is in money value


as of a given date or adjusted to net out price changes.
WEALTH

•'Wealth' refers to some accumulation of resources, whether abundant or not.


•In economics, wealth is the net worth of a person, household, or nation, that is,
the value of all assets owned net of all liabilities owed at a point in time.
• For national wealth as measured in the national accounts, the net liabilities are
those owed to the rest of the world.
• The term may also be used more broadly as referring to the productive capacity
of a society or as a contrast to poverty.
•Analytical emphasis may be on its determinants or distribution.
UTILITY
•In economics, utility is a measure of relative satisfaction.
•In other words, it is a term referring to the total satisfaction received by a
consumer from consuming a good or service. Given this measure, one may speak
meaningfully of increasing or decreasing utility, and thereby explain economic
behavior in terms of attempts to increase one's utility.
•Utility is often modeled to be affected by consumption of various goods and
services, possession of wealth and spending of leisure time.
•Utility is taken to be correlative to Desire or Want.
•It has been already argued that desires cannot be measured directly, but only
indirectly, by the outward phenomena to which they give rise: and that in those
cases with which economics is chiefly concerned the measure is found in the price
which a person is willing to pay for the fulfilment or satisfaction of his desire.
VALUE

•An economic value is the worth of a good or service as determined by


the market.
•Value is linked to price through the mechanism of exchange.
•When an economist observes an exchange, two important value
functions are revealed: those of the buyer and seller.
• Just as the buyer reveals what he is willing to pay for a certain amount
of a good, so too does the seller reveal what it costs him to give up the
good.
UNIT 8
Economic organization of
society. Consumption, wants,
their characteristics and laws
based upon them.

11-Apr-19 A ppt on Economics 51


Three-Sector Theory
The three-sector theory is an economic theory which divides economies into
three sectors of activity: extraction of raw materials (primary), manufacturing
(secondary), and services (tertiary). It was developed by Alan Fisher, Colin
Clark and Jean Fourastié.
According to the theory, the main focus of an economy's activity shifts from
the primary, through the secondary and finally to the tertiary sector. Fourastié
saw the process as essentially positive, and in The Great Hope of the
Twentieth Century he writes of the increase in quality of life, social security,
blossoming of education and culture, higher level of qualifications,
humanisation of work, and avoidance of unemployment.
Countries with a low per capita income are in an early state of development;
the main part of their national income is achieved through production in the
primary sector. Countries in a more advanced state of development, with a
medium national income, generate their income mostly in the secondary
sector. In highly developed countries with a high income, the tertiary sector
dominates the total output of the economy.

11-Apr-19 A ppt on Economics 52


Structural transformation
according to Fourastié
 The distribution of the workforce among the three
sectors progresses through different stages as follows,
according to Fourastié:
 First phase: Traditional civilizations
 Workforce quotas:
 Primary sector: 65%
 Secondary sector: 20%
 Tertiary sector: 15%
 This phase represents a society which is scientifically not
yet very developed, with a negligible use of machinery. The
state of development corresponds to that of European
countries in the early Middle Ages, or that of a modern-
day developing country 11-Apr-19 A ppt on Economics 53
Second phase: Transitional
period
 Workforce quotas:
 Primary sector: 40%
 Secondary sector: 40%
 Tertiary sector: 20%
 More machinery is deployed in the primary sector, which reduces
the number of workers needed. As a result, the demand for
machinery production in the secondary sector increases. The
transitional way or phase begins with an event which can be
identified with the industrialisation: far-reaching mechanisation (and
therefore automation) of manufacture, such as the use of conveyor
belts.
 The tertiary sector begins to develop, as do the financial sector and
the power of the state.

11-Apr-19 A ppt on Economics 54


Third phase: Tertiary
civilization
 Workforce quotas:
 Primary sector: 10%
 Secondary sector: 20%
 Tertiary sector: 70%
 The primary and secondary sectors are increasingly dominated by
automation, and the demand for workforce numbers falls in these
sectors. It is replaced by the growing demands of the tertiary
sector. The situation now corresponds to modern-day industrial
societies and the society of the future, the service or post-
industrial society. Today the tertiary sector has grown to such an
enormous size that it is sometimes further divided into an
information-based quaternary sector, and even a quinary sector
based on human services.

11-Apr-19 A ppt on Economics 55


Consumption:

Consumption is the process by which goods and services are, at last,


put to final use by people. Consumption is at the end of the line of
economic activities that starts with an evaluation of available
resources and proceeds through production of goods and services
and distribution of goods and services (or the means to acquire
them) among people and groups. At last, the goods and services
themselves come to be used.
Wants:

Man is a bundle of desires. His wants are infinite in variety and number.
Some wants are natural, for example foods, air, clothing and shelter
without which existence of man’s life is not possible. Similarly wants
vary from individual to individual and they multiply with civilization.
Classification of Wants:
The wants can be classified as under.

•Necessaries: These can be sub divided as –

a. Necessaries of existence: The things without which we can not exist e.g. water,
food, clothing, shelter.
b. Conventional necessaries: The things which we are forced to use by social custom.

•Comforts: After satisfying our necessaries we desire to have some comforts. For
example table and chair for a student help to increase the efficiency. But cushioned
costly chair is not a comfort.

•Luxuries: Luxury means superfluous consumption. After getting comforts, man


desire luxury. The luxury articles need not required e.g. gold and silver, costly
furniture, etc.
Characteristics of Human Wants:

 Human wants are unlimited: Man’s mind is so made that he never


completely satisfied and hence there is no end to human wants. One want is
satisfied another want will crop up to take its place and thus it is never ending
cycle of want.

 Any particular want is satiable: Though the wants are unlimited, but it is
possible to satisfy a particular want, provided has the means (resource).

 Wants are complementary: It is a common experience that we want things


in groups. A single article out of group can not satisfy human wants by it self.
It needs other things to complete its use e.g. a motor-car needs petrol and
mobile oil it starts working. Thus the relationship between motor-car and
petrol is complementary.

 Wants are competitive: Some wants competes to other. We all have a


limited amount of money at our disposal; therefore we must choose some
things and reject the other. E.g. sugar and jaggery, tea and coffee.
Characteristics of Human Wants…

Some Wants are both complimentary and competitive: When use of machinery is
done the use of labour needs to be reduced. This indicates competitive nature. But to
run the machinery the labour is also required and as such it indicates complimentary
relationship.

Wants are alternative: There are several ways of satisfying a particular want. If we feel
thirsty, we can have water, lassi, in summer while coffee, tea in winter. The final choice
depends upon availability of money and the relative prices.

Wants vary with time place and person: Wants are not always the same. It varies with
individual to individual. People want different things at different times and in different
places.

Wants vary in Urgency and Intensity: All wants are not equally urgent and in tense.
Some wants are urgent while some are less urgent.
Characteristics of Wants…
Wants multiply with civilization: With the advancement the wants multiply. Therefore the wants
of people living in urban area are more than the villagers. With civilization the demand for radio,
T.V, motor-car etc, are increasing.

Wants are recur: Some wants are recurring in nature, e.g. food we require again and again.

Wants change into habits: If a particular want is regularly satisfied a person becomes used to it
and it grows into habit e.g. smoking of cigarette and use of drugs.

Wants are influenced by income, salesmanship and advertisement: It income is higher more
wants can be satisfied. Many things we buy of particular brands due to salesmanship or
advertisement.

Wants are the result of custom or convention: As a part of custom and convention we buy many
thins. Really they are not required but unlikely we have to purchase it e.g. expenses on social
ceremonies.

Present wants are more important then future wants: Future is uncertain and hence man is
more concerned with the satisfaction of the present wants rather than future wants.
Unit 9
Standard of Living, Market Value,
Opportunity Costs, Law of Returns,
Demand and Supply

11-Apr-19 A ppt on Economics 62


STANDARD OF LIVING
What Does Standard Of Living Mean?

 The level of wealth, comfort, material goods and


necessities available to a certain socioeconomic
class in a certain geographic area.

 The standard of living includes factors such as


income, quality and availability of employment.

 class disparity, poverty rate, quality and


affordability of housing.

 hours of work required to purchase necessities.


 gross domestic product, inflation rate,
number of vacation days per year.

 affordable (or free) access to quality


healthcare, quality and availability of
education, life expectancy, incidence of
disease, cost of goods and services.

 infrastructure, national economic growth,


economic and political stability, political
and religious freedom, environmental
quality, climate and safety. The standard
of living is closely related to quality of life.
 Measuring standard of living
 There can be problems even with just using numerical averages to
compare material standards of living, as opposed to, for instance, a
Pareto index (a measure of the breadth of income or wealth
distribution). Standards of living are perhaps inherently subjective.
As an example, countries with a very small, very rich upper class
and a very large, very poor lower class may have a high mean level
of income, even though the majority of people have a low "standard
of living". This mirrors the problem of poverty measurement, which
also tends towards the relative. This illustrates how distribution of
income can disguise the actual standard of living.
 SOL is a degree of prosperity in a nation, as measured by income
levels, quality of housing and food, medical care, educational
opportunities, transportation, communications, and other measures.
The standard of living in different countries is frequently compared
based on annual per capita income. On an individual level, the
standard of living is a measure of the quality of life in such areas as
housing, food, education, clothing, transportation, and employment
opportunities.
 Market value
 is the price at which an asset would trade in a competitive auction setting.
Market value is often used interchangeably with open market value, fair
value or fair market value, although these terms have distinct definitions in
different standards, and may differ in some circumstances.

 Market value is a concept distinct from market price, which is “the price at
which one can transact”, while market value is “the true underlying value”
according to theoretical standards. The concept is most commonly
invoked in inefficient markets or disequilibrium situations where prevailing
market prices are not reflective of true underlying market value. For
market price to equal market value, the market must be informationally
efficient and rational expectations must prevail. Market value is also
distinct from fair value in that fair value depends on the parties involved,
while market value does not.
 Standard of living is generally measured
by standards such as real (i.e. inflation
adjusted) income per person and poverty
rate.
 Other measures such as access and quality
of health care, income growth inequality
and educational standards are also used.
 Examples are access to certain goods (such
as number of refrigerators per 1000
people), or measures of health such as life
expectancy. It is the ease by which people
living in a time or place are able to satisfy
their needs and/or wants.
 Hence we can conclude that the Standard of Living,
suggests the level of well-being of an individual,
household or firm as measured by various
parameters like income, consumption etc. However
to be more specific the widely acknowledged
measure for standard of living is: Average real gross
domestic product(GDP) per capita.

We can explain this terms as follows:

 GDP measures annual economic output — the total


value of new goods and services produced within a
country’s borders.
 Real GDP is the inflation-adjusted value.
 Average GDP per capita tells us how big each
person’s share of GDP would be if we were to divide
the total into equal portions.
 Market value is the price at which an
asset would trade in a competitive
auction setting. Market value is
often used interchangeably with
open market value, fair value or fair
market value, although these terms
have distinct definitions in different
standards, and may differ in some
circumstances.
 International Valuation Standards
defines market value as "the
estimated amount for which a
property should exchange on the
date of valuation between a willing
buyer and a willing seller in an
arm’s-length transaction after
proper marketing wherein the
parties had each acted
knowledgeably, prudently, and
without compulsion.
 Overpricing and underpricing
These two words are used to say that a
price is too high or too low in regard to
the expectations of an individual or a
group. It is a matter or comparison to
personal expectations or/and some
comparison tool as a chart, table, formula
that is agreed upon and set forth as a
common viewpoint by those people.
•Basic Economics
 Economics is the study of how people choose to use resources.

 Although the behavior of individuals is important, economics also


addresses the collective behavior of businesses and industries,
governments and countries, and the globe as a whole. Microeconomics
starts by thinking about how individuals make decisions.

 Macroeconomics considers aggregate outcomes. The two points of


view are essential in understanding most economic phenomena.

 The list of fields in economics illustrates the scope of economic


thought.
 In short, economics includes the study of labor, land, and investments,
of money, income, and production, and of taxes and government
expenditures. Economists seek to measure well-being, to learn how
well-being may increase over time, and to evaluate the well-being of
the rich and the poor. The most famous book in economics is the
Inquiry into the Nature and Causes of The Wealth of Nations written by
Adam Smith, and published in 1776 in Scotland.
Definitions of conomics from Historic Textbooks
"Economics is the study of people in the ordinary
business of life.“

-- Alfred Marshall, Principles of economics; an


introductory volume (London: Macmillan, 1890)
"Economics is the science which studies human
behavior as a relationship between given ends and
scarce means which have alternative uses."
-- Lionel Robbins, An Essay on the Nature and
Significance of Economic Science (London:
MacMillan, 1932)
Economics is the "study of how societies use scarce
resources to produce valuable commodities and
distribute them among different people."
-- Paul A. Samuelson, Economics (New York:
McGraw-Hill, 1948)
Why this is Important??????
Levels of income and wealth are key determinates of individual
or family wellbeing. Economic standard of living involves a complex
combination of factors such as income, living costs, and household
size and composition.
The more prosperous an economy, the better off the residents of that
economy are in terms of opportunities to gain a higher income, buy
material possessions and access quality health care. In general, this
leads to greater social connectedness, educational advancement,
wider employment options and increased life expectancy.
Indicators

Five indicators are used to provide information on


different aspects of economic standards of living. They are:
market income per person, income inequality, the population with
low incomes, housing affordability and household crowding.

The focus is on objective measures of economic living


standards. Together, the indicators provide information about
overall trends in living standards, levels of hardship and how
equitably resources are distributed. All are relevant to the
adequacy of people’s incomes and their ability to participate in
society and to choose how to live their lives.

Income inequality is measured by comparing the


incomes of higher income households (80th percentile) with the
incomes of lower income households (20th percentile). High
levels of inequality are associated with lower levels of social
cohesion and overall life satisfaction, even when less well-off
people have adequate incomes to meet their basic needs.
The proportion of the population with low incomes also
provides information about how equitably resources are distributed
and how many people may be experiencing difficulty in participating
fully in society through a lack of income.

Housing affordability measures the proportion of the


population spending more than 30 percent of their disposable income
on housing. Housing costs have a major impact on overall material
living standards, especially for low-income households.

The final indicator measures the proportion of the population


living in crowded households. Crowded housing is a well-known
health risk and this indicator provides a direct measure of the extent
of this problem over time.
MARKET VALUE
What Does Market Value Mean?

 Thecurrent quoted price at which investors


buy or sell a share of common stock or a
bond at a given time. Also known as
"market price".

 The market capitalization plus the market


value of debt. Sometimes referred to as
"total market value".
 Market value is the price at which an
asset would trade in a competitive
auction setting. Market value is often used
interchangeably with open market value,
fair value or fair market value, although
these terms have distinct definitions in
different standards, and may differ in some
circumstances.
 International Valuation Standards defines
market value as "the estimated amount
for which a property should exchange on
the date of valuation between a willing
buyer and a willing seller in an arm’s-
length transaction after proper marketing
wherein the parties had each acted
knowledgeably, prudently, and without
compulsion.
 Overpricing and underpricing
These two words are used to say that a
price is too high or too low in regard to
the expectations of an individual or a
group. It is a matter or comparison to
personal expectations or/and some
comparison tool as a chart, table, formula
that is agreed upon and set forth as a
common viewpoint by those people.
OPPORTUNITY COST

 Opportunity cost is the cost of any activity


measured in terms of the value of the best
alternative that is not chosen (that is foregone).
It is the sacrifice related to the second best
choice available to someone, or group, who has
picked among several mutually exclusive
choices.

 The opportunity cost is also the cost of the


forgone products after making a choice.
Opportunity cost is a key concept in economics,
and has been described as expressing "the
basic relationship between scarcity and choice".
Opportunity Cost

 Opportunity cost is the best


alternative that we forgo, or give
up, when we make a choice or a
decision.
 Opportunity costs arise
because time and resources are
scarce. Nearly all decisions
involve trade-offs.
 The notion of opportunity cost
plays a crucial part in ensuring that
scarce resources are used
efficiently.Thus, opportunity costs are
not restricted to monetary or financial
costs: the real cost of output forgone,
lost time, pleasure or any other
benefit that provides utility should
also be considered opportunity costs.
Applications of Opportunity Cost

The concept of opportunity cost has a wide range


of applications including:
- Consumer choice
- Production possibilities
- Cost of capital
- Time management
- Career choice
l
Law of Returns to Scale
The Law Of Diminishing Returns.
Statement Of The Law
The most important economic law under the head of production is
known as the "Law of Diminishing Returns." This law applies alike
to land, to labor, and to capital. Stated in terms of land in the
simplest possible maimer, the law is:
As additional units of labor and capital are
applied to the utilization of a given piece of land,
the increase in the product gained from the land
will for a time be greater than the increase in
the number of units of labor and capital
expended; after which the increase in the
product will decline relative to the increase in
the number of units of labor and capital.

11-Apr-19 A ppt on Economics 86


Production, Law of Returns
 Production is creation or addition of utility and exchange
value in a commodity or service. Anything used in
production of goods and services as inputs are called factors
of production. Primary factors are Land and Labour ,
secondary factors are capital and organization.
 Law of Returns to scale describes the relationship between
outputs and the scale of inputs in the long run when all the
inputs are increased in the same proportion.
 Land a free gift of nature, permanent, limited in supply,
immobile, subject to law of diminishing returns, gets
different prices, passive factor of production.
 Law of Diminishing Returns explains what happens if
successive units of variable factor are added to a given
quantity of a fixed factor
Application Of The Law
 The operation of the law of diminishing returns is best observed in
agriculture. Obviously, the product to be gained from a plot of land by one
man unaided by machinery of any sort would be relatively small. He could, as
the primitive American Indian did before him, scratch the ground with a
sharpened stick and cultivate his crops with a shell. Given a strong hoe, it is
likely that he could materially increase the quantity of his crop. Thus, step by
step with the aid of horses, improved machinery, drain tile, fertilizer, and
laborers our farmer would find it possible for a time to increase the product
of his land faster than his increase in the application of labor and capital. He
would find also that eventually the product arising from the addition of a unit
of labor and capital was less than the product arising from the application of
the preceding unit. Then he would have reached the point of diminishing
returns. Further applications of labor and capital would show a constant
decrease in product attributable to the successive units of labor and capital
employed. Presently the point of greatest efficiency would be reached, which
we may say is the point where labor and capital can be applied to the very
best advantage on this particular piece of11-Apr-19
land. A ppt on Economics 88
Law of Returns to Scale

Concerned with the study of the production function


with all the factors variable. The Law describes the
relationship between the outputs and the scale of inputs
in the long run when all the inputs are increased in the
same proportion. By returns to scale is meant the
behavior of production or returns when all the
productive factors are increased or decreased
simultaneously in the same ratio. The way the total
output behaves to a change in all the factors of
production is known as the law of returns to scale.
Given these assumptions, when all inputs are
increased in unchanged proportion and the scale of
production is expanded, the effect on output shows
three stages. Firstly, returns to scale increase because
the increase in the total output is more than
proportionate to the increase in all inputs. Secondly,
returns to scale become constant as the increase in
total input is in exact proportion to the increase in
inputs. Lastly, returns to scale diminish because the
increase in output is less than proportionate to the
increase in inputs. These three tendencies are refered
as increasing returns to scale, constant returns to scale
and diminishing returns to scale.
Explained with the help of the Table below:
Unit Scale of production Total returns

1 1 worker + 2 Acres of land 8 8}


2 2 workers + 4 Acres of land 17 9} Increasing returns
3 3 workers + 6 Acres of land 27 10}
4 4 workers + 8 Acres of land 38 11} Constant returns
5 5 workers + 10 Acres of land 49 11}
6 6 workers + 12 Acres of land 60 11}
7 7 workers + 14 Acres of land 69 9} Diminishing returns
8 8 workers + 16 Acres of land 77 9}
RS = Returns to scale curve
RP = Segment; increasing returns to scale
PQ = segment; constant returns to scale
QS = segment; decreasing returns to scale
11-Apr-19 A ppt on Economics 92
Also refer the attached file RtrnsScl
(Returns to Scale).

11-Apr-19 A ppt on Economics 93


Some common economic terms
 Rent is the price paid for the services of land.
 Labour means mental or physical work done with a
view of earning an income.
 Wages are the prices paid for the use of labour.
 Capital includes all those manmade goods which are
used in further production of wealth.
 Cost of production includes the money paid out by
the firm in order to produce a commodity
 Opportunity cost is the most attractive alternative
foregone or the next best choice sacrificed in the
production of a commodity.
 Market is an area where potential sellers of goods or
service are brought into contact with potential buyers
through a means of exchange.
Welfare,Incomes,Inflation
 Welfare Economics is the study of conditions that maximize
economic welfare of the society as a whole.
 National Income is the net output of commodities and
services from the country‘s productive systems in the hands
of the ultimate consumers.
 GNP is the aggregate value of goods and services produced
by a country
 Per capita income is the income per head of population in a
country, obtained by dividing the national income of the
country by it’s population.
 Inflation is a process of raising prices; it is a situation where
the general level of prices increase and the value of money
falls. Deflation on the contrary is when the value of money
is raising and the prices are falling.
ECONOMIC SYSTEMS

11-Apr-19 A ppt on Economics 96


REFER TO THE ATTACHED FILE
CptlsmSclsmMxdEcnmy
(Capitalism, Socialism & Mixed Economy)

11-Apr-19 A ppt on Economics 97


ECONOMIC SYSTEMS

•Command economy An economy in


which a central government either
directly or indirectly sets output
targets, incomes, and prices.

•Mixed economy is an economic


system that incorporates a mixture of
private and government ownership or
control, or a mixture of capitalism and
socialism 98
Economic Policy
Criteria for judging economic outcomes:
 Efficiency, or allocative efficiency. An efficient
economy is one that produces what people
want at the least possible cost.
 Equity, or fairness of economic outcomes.
 Growth, or an increase in the total output of
an economy.
 Stability, or the condition in which output is
steady or growing, with low inflation and full
employment of resources.
The Difference Between a Line and a Curve

Equal increments in X lead Equal increments in X lead


to constant increases in Y. to diminished increases in Y.
Economical assumptions..
Economics as a discipline is based on
certain assumptions which provide the
basic framework in understanding the
subject:

1) The principle of maximization.


2) Rational behavior.
3) Perfect knowledge.
4) Needs of average or common man.
5) Ceteris paribus or other things being
equal.
6) The concept of equilibrium.
101
OPPORTUNITY COST
 Opportunity cost is the cost of any activity measured in
terms of the value of the best alternative that is not chosen
(that is foregone). It is the sacrifice related to the second
best choice available to someone, or group, who has picked
among several mutually exclusive choices. The opportunity
cost is also the cost of the forgone products after making a
choice. Opportunity cost is a key concept in economics, and
has been described as expressing "the basic relationship
between scarcity and choice". The notion of opportunity cost
plays a crucial part in ensuring that scarce resources are used
efficiently. Thus, opportunity costs are not restricted to
monetary or financial costs: the real cost of output forgone,
lost time, pleasure or any other benefit that provides utility
should also be considered opportunity costs.
 The concept of opportunity cost was first developed in 1914
by Friedrich von Wieser in his book "Theorie der
gesellschaftlichen Wirtschaft
STANDARD OF LIVING
 Standard of living is generally measured
by standards such as real (i.e. inflation
adjusted) income per person and poverty
rate. Other measures such as access and
quality of health care, income growth
inequality and educational standards are also
used. Examples are access to certain goods
(such as number of refrigerators per 1000
people), or measures of health such as life
expectancy. It is the ease by which people
living in a time or place are able to satisfy
their needs and/or wants.
 Standard of living is often used as an economic component to
measure people's welfare. It usually refers to the economic
level achieved by an individual, household or firm. It may also be
a measure of the goals that individuals set for themselves as
consumers. Standard of living refers to the level of wealth,
comfort, material goods and necessities available to a certain
socioeconomic class in a certain geographic area. The standard
of living includes factors such as income, quality and availability
of employment, class disparity, poverty rate, quality and
affordability of housing, hours of work required to purchase
necessities, gross domestic product, inflation rate, number of
vacation days per year, affordable (or free) access to quality
healthcare, quality and availability of education, life expectancy,
incidence of disease, cost of goods and services, infrastructure,
national economic growth, economic and political stability,
political and religious freedom, environmental quality, climate
and safety. The standard of living is closely related to quality of
life.
 Hence we can conclude that the
Standard of Living, suggests the level
of well-being of an individual,
household or firm as measured by
various parameters like income,
consumption etc. However to be
more specific the widely
acknowledged measure for standard
of living is: Average real gross
domestic product(GDP) per capita.
GDP can be explained as:
 GDP measures annual economic
output - the total value of new
goods and services produced within
a country’s borders.
 Real GDP is the inflation-adjusted
value.
 Average GDP per capita tells us how
big each person’s share of GDP
would be if we were to divide the
total into equal portions.
 Standard of Living can be measured by
using various methods. Some of the
commonly used methods are, the Income
Method, the Consumption Method, Private
consumption expenditure etc
In general terms income refers to the
earnings from productive activities as well
as those from current transfers. It
comprises of claims on goods and services
by individuals or households. On the other
hand, Consumption refers to resources
actually consumed by the individuals or
households with the help of the given
income.
SUPPLY AND DEMAND
 Supply and demand is an economic
model of price determination in a market.
It concludes that in a competitive market,
the unit price for a particular good will
vary until it settles at a point where the
quantity demanded by consumers (at
current price) will equal the quantity
supplied by producers (at current price),
resulting in an economic equilibrium of
price and quantity.
 The four basic laws of supply and demand are:
 If demand increases and supply remains
unchanged, then it leads to higher equilibrium
price and quantity.
 If demand decreases and supply remains
unchanged, then it leads to lower equilibrium
price and quantity.
 If supply increases and demand remains
unchanged, then it leads to lower equilibrium
price and higher quantity.
 If supply decreases and demand remains
unchanged, then it leads to higher price and
lower quantity.
Demand, Supply, And Price
No two terms employed in the language of economics are
better known and oftener misused than demand and supply. One
of the most severe critics of our subject once said that a parrot
could be made an economist by merely teaching him to answer
"demand and supply ' to every question put to him. This
statement was extreme and meant to ridicule. Yet it has a sound
foundation, for relatively few people have ever seriously
attempted to analyze the nature of these terms. We have
already seen that demand is effective desire; also that an
individual has a demand only when he is willing and able to
satisfy it by foregoing the use of other goods - that is, to pay the
current price. Desires, therefore, are constantly becoming
demands. In the light of this knowledge we can, by recasting
slightly the meaning of the word demand, say that there are
active demands (demands in the strict sense of the word) and
potential demands (desires or wants).

11-Apr-19 A ppt on Economics 113


Demand, Supply, And Price
 Likewise, supply may mean one of three things. First, it may mean the
supply of goods offered at the current price - that is, the supply which
owners are willing to furnish on the instant at the market price.
Second, supply may mean, in addition to the amount supplied, goods
that would be offered at higher prices. Third, it may mean goods not
yet produced, owing either to a lack of time or to an unsatisfactory
market price.
 It is apparent no doubt that neither demand nor supply works
independently of the other; that there is a close mutual relationship.
Any increase in demand, other things remaining equal, produces a
change in supply; and conversely, any change in supply produces a
change in demand. Professor Marshall has likened them to the two
blades of a pair of shears, both of which are necessary if any cutting is
to be done. It is also apparent from this analogy that supply and
demand naturally tend to approach each other. Increase in demand
tends to raise price, and, consequently, causes an increase in supply.
An increase in supply, on the other hand, tends to lower price, thus
increasing the demand.

11-Apr-19 A ppt on Economics 114


DEMAND and SUPPLY
• Supply and demand is perhaps one of the
most fundamental concepts of economics
and it is the backbone of a market
economy.
DEMAND
• Demand refers to how much (quantity) of a
product or service is desired by buyers.
The quantity demanded is the amount of a
product people are willing to buy at a
certain price; the relationship between
price and quantity demanded is known as
the demand relationship.
SUPPLY
• Supply represents how much the market can
offer.
• The quantity supplied refers to the amount of a
certain good producers are willing to supply
when receiving a certain price.
• The correlation between price and how much of
a good or service is supplied to the market is
known as the supply relationship. Price,
therefore, is a reflection of supply and demand.
The Law of Demand

• The law of demand states that, if all other


factors remain equal, the higher the price of a
good, the less people will demand that good.
• In other words, the higher the price, the lower
the quantity demanded. The amount of a good
that buyers purchase at a higher price is less
because as the price of a good goes up, so does
the opportunity cost of buying that good.
• As a result, people will naturally avoid buying
a product that will force them to forgo the
consumption of something else they value
more. The chart below shows that the curve is
a downward slope.

The Law of Supply

• The law of supply demonstrates the quantities


that will be sold at a certain price. But unlike
the law of demand, the supply relationship
shows an upward slope.
• This means that the higher the price, the
higher the quantity supplied. Producers supply
more at a higher price because selling a higher
quantity at a higher price increases revenue.
Demand and Supply
 Demand for a commodity or service refers to the desire for
that commodity or service coupled with ability and
willingness to pay for it. Demand is a function of price. Other
things being equal, the amount demanded increases with a
fall in price and diminishes with a rise in price. Demand law
states an inverse relation between the price and the quantity
demanded. Price elasticity of demand may be defined as a
change in demand due to given change in price.
 Supply The quantity of commodity that a seller is willing and
able to offer for sale at different prices is called supply.
Supply is a function of each of the economic factors that
influence it. Other things being same, as the price of a
commodity raises its supply is extended, and as the price falls
its supply is contracted. Thus supply and prices move in the
same direction.
Law of Supply

The law of supply states that


there is a direct (positive)
relationship between price and
quantity supplied.
Supply

Quantity supplied is the amount


of a good that sellers are willing
and able to sell.
DEMAND and SUPPLY
• Supply and demand is perhaps one of the
most fundamental concepts of economics
and it is the backbone of a market
economy.
DEMAND
• Demand refers to how much (quantity) of a
product or service is desired by buyers.
The quantity demanded is the amount of a
product people are willing to buy at a
certain price; the relationship between
price and quantity demanded is known as
the demand relationship.
SUPPLY
• Supply represents how much the market can
offer.
• The quantity supplied refers to the amount of
a certain good producers are willing to supply
when receiving a certain price.
• The correlation between price and how much
of a good or service is supplied to the market
is known as the supply relationship. Price,
therefore, is a reflection of supply and
demand.

The Law of Demand

• The law of demand states that, if all other


factors remain equal, the higher the price of a
good, the less people will demand that good.
• In other words, the higher the price, the lower
the quantity demanded. The amount of a good
that buyers purchase at a higher price is less
because as the price of a good goes up, so does
the opportunity cost of buying that good.
• As a result, people will naturally avoid buying
a product that will force them to forgo the
consumption of something else they value
more. So,the curve is a downward slope.

The Law of Supply

• The law of supply demonstrates the quantities


that will be sold at a certain price. But unlike
the law of demand, the supply relationship
shows an upward slope.
• This means that the higher the price, the
higher the quantity supplied. Producers supply
more at a higher price because selling a higher
quantity at a higher price increases revenue.
Demand and Supply
 Demand for a commodity or service refers to the desire for
that commodity or service coupled with ability and willingness
to pay for it. Demand is a function of price. Other things being
equal, the amount demanded increases with a fall in price and
diminishes with a rise in price. Demand law states an inverse
relation between the price and the quantity demanded. Price
elasticity of demand may be defined as a change in demand
due to given change in price.
 Supply The quantity of commodity that a seller is willing and
able to offer for sale at different prices is called supply. Supply
is a function of each of the economic factors that influence it.
Other things being same, as the price of a commodity raises its
supply is extended, and as the price falls its supply is
contracted. Thus supply and prices move in the same
direction.
Equilibrium of
Price of
Supply and Demand
Ice-Cream
Cone
Supply
$3.00

2.50 Equilibrium

2.00

1.50

1.00

0.50 Demand
Quantity of
0 1 2 3 4 5 6 7 8 9 10 11 12 Ice-Cream
Cones
Excess Supply
Price of
Ice-Cream
Cone
Supply
$3.00 Surplus

2.50

2.00

1.50

1.00

0.50 Demand
Quantity of
0 1 2 3 4 5 6 7 8 9 10 11 12 Ice-Cream
Cones
Excess Demand
Price of
Ice-Cream
Cone

Supply

$2.00
$1.50

Shortage Demand

0 1 2 3 4 5 6 7 8 9 10 11 12 13 Quantity of
Ice-Cream Cones
Terms to develop in production and consumer economics
 One of the most basic concepts of economics is want vs.
need.
 What are they exactly?
 A need is something you have to have, something you can't
do without. A good example is food. If you don't eat, you
won't survive for long. Many people have gone days
without eating, but they eventually ate a lot of food. You
might not need a whole lot of food, but you do need to eat.
 A want is something you would like to have. It is not
absolutely necessary, but it would be a good thing to have.
A good example is music. Now, some people might argue
that music is a need because they think they can't do
without it. But you don't need music to survive. You do
need to eat.
 What is a Price?
 One might, in all sincerity, ask the question, "Just what is a price?" In all sincerity, the
answer might be, "Well, that depends." The following paragraphs and frames attempt
to define on just what a definition of price may depend. It could be said to be:
 What a product "ought to sell for."
 From a consumer`s standpoint, a price may take the form of a relative or comparative
standard with the prices of similar or related products. A consumer may compare
types of products and features between manufacturers or within a line of products. In
this case, the consumer can feel a relative price range or variance.
 From a manufacturer`s standpoint, price should aid in forecasting cost-volume-profit
relationships and provide for a fair return on investment.
 "What we can get."
 This viewpoint of price is often called "charging what the market will bear."
Often this happens at various places in the country due to real shortages caused
by mismatched demand and supply or due to transportation or storage
problems.
UNIT 10
Urban land values, land
utilization, factors involved
in development of urban
land.

11-Apr-19 A ppt on Economics 137


Urban Economics

138
Basic Urban Economics
 Primary Factors of Production
◦ Land
◦ Labor
◦ Capital
◦ Raw Materials

 Note:
 Mobility
 Euler’s Theorem
INTRODUCTION:
 A three-dimensional representation of the variation in land
values across a city. Most urban land-value surfaces have
a peak land-value intersection (PLVI) within the CBD, where
accessibility is at a maximum. Values fall with distance from
the PLVI, but at varying gradients, and sub-peaks exist at more
accessible locations: along ring roads, and especially where
routes radiating from the city centre intersect ring roads. It is
argued that the land value surface is of major importance in
determining urban land use.
FACTORS AFFECTING LAND
VALUES:
Many factors influence the value of
real estate. For urban areas which
are characterized by higher density
populationsthere are more factors
that affect a property's value than
there would be in a more rural area
with fewer development options.
Location, use, and applicable
legislation all contribute to the
value of land in urban settings.
URBAN LAND:
 DEFINITION: Urban land that is subject to Wealth-tax under
definition of “asset” generally covers only vacant land; when
urban land is utilised for construction of a building with
approval of prescribed authority, then that land ceases to be
identifiable as urban land. Once the non-productive asset like
urban land is converted into a productive asset like a building
which qualifies for exemption, then the assessee can start
availing exemption even during the period of conversion of
such non-productive asset to productive asset.

 PROXIMITY TO TRANSPORTATION: According to Public


Transportation, proximity to public transportation makes
properties more desirable and hence increases their value. Urban
properties, which tend to have denser populations, have more
transportation options such as trains, light rail services, bike lanes,
bus routes and highway ramps. Prospective renters and owners in
the urban market look for properties that offer convenient access
to various forms of transportation.
LAND UTILIZATION:
The pattern of land-use of a country at any particular time is
determined by the physical, economic & institutional framework taken
together. In other words, the existing land-use pattern in different
regions in India has been evolved as the result of the action &
interaction of various factors, such as the physical characteristics of
land, the institutional framework, the structure of other resources
(capital,labour,etc.) available & the location of the region in relation to
other aspects of economic development, e.g. those relating to
transport as well as to industry & trade. The present pattern
can,therefore, be considered to be in some sort of static harmony &
adjustment with the other main characteristics of the economy of the
region. In the dynamic context, keeping in view the natural
endowments & the recent advances in technology, the overall
interests of a country may dictate a certain modification of or a
change in the existing land-use pattern of a region. A close study of
the present land-use patterns & the trends during recent years will
help to suggest the scope for planned shifts in the patterns.
UTILITY, SCARCITY AND DESIRABILITY

Land value can be thought of as the relationship between a desired location and
a potential user. The ingredients that constitute land value are utility, scarcity
and desirability. These factors must all be present for land to have value.

Land that lacks utility and scarcity also lacks value, since utility arouses desire
for use and has the power to give satisfaction. The air we breathe has utility and
is generally considered important, since it sustains and nourishes life. However,
in the economic sense, air is not valuable because it hasn't been appropriated
and there is enough for everyone. Thus there is no scarcity -- at least at the
moment. This may not be true in the future, however, as knowledge of air
pollution and its effect on human health make people aware that clean and
breathable air may become scarce and subsequently valuable.

By themselves, utility and scarcity confer no value on land. User desire backed
up by the ability to pay value must also exist in order to constitute effective
demand. The potential user must be able to participate in the market to satisfy
their desire.
FACTORS THAT CONTRIBUTE TO LAND VALUE

The physical attributes of land include


* quality of location, fertility and climate;
* convenience to shopping, schools and parks;
* availability of water, sewers, utilities and public transportation;
* absence of bad smells, smoke and noise; and
* patterns of land use, frontage, depth, topography, streets and lot sizes.

The legal or governmental forces include


* the type and amount of taxation,
* zoning and building laws,
* planning and restrictions.

The social factors include The economic forces include


* population growth or decline, * value and income levels,
* changes in family sizes, * growth and new construction,
* typical ages, * vacancy and
* attitudes toward law and order, * availability of land.
* prestige and
* education levels.

It is the influences of these forces, expressed independently and in relationship to one


another, that help the people and the assessor measure value.
Transfer Of Development Rights (TDRs)

WHAT IS TDR?

Transfer of Development Rights (TDR) means making available certain


amount of additional built up area in lieu of the area relinquished or
surrendered by the owner of the land, so that he can use extra built up
area either himself or transfer it to another in need of the extra built up
area for an agreed sum of money.
Transfer of development rights (TDR) is one "smart growth" tool used to manage
land development. TDR is the exchange of zoning privileges from areas with low
population needs, such as farmland, to areas of high population needs, such as
downtown areas. These transfers allow for the preservation of open spaces and
historic landmarks, while allowing urban areas to expand and increase in density.

Purpose of TDR:

The process of land acquisition in urban areas for public purpose


especially for road widening, parks and play grounds, schools etc., is
complicated, costly and time consuming. In order to minimize the time
needed and to enable a process, which could be advantageously put into
practice to acquire land for reservation purposes mentioned above.
History of TDR

– Started first in europe countries in 1950’s to develop the agriculture land


– In 1980’s India started implementing TDR
– Bombay introduced TDR in 1990 to develop the slum
– Hyderabad introduced TDR to widen the road

 Types of TDR

– Road widening, slum, Heritage, Agriculture land etc, Alternative


methods of Land Acquisition
– Normally land acquisition was done through L A Act, but it is long
process, so Government is implementing, TDR by which it is easy to get
land
without any litigation
Legal Basis for TDR:

The Government of Karnataka felt it necessary to amend the K.T.C.P Act


1961 in order to empower the local bodies (Corporations / Planning
Authorities) to permit additional FAR for the land handed over free of cost
whenever such lands are required for road widening, and / or for formation
of new roads or for development of parks, playgrounds and other civic
amenities etc. As a result the Government has inserted a new section
14B in the K.T.C.P Act 1961.

Zones of TDR:

Based on the intensity of development, the city is divided into intensively


developed (A-zone), moderately developed (B-zone) and sparsely
developed (C-zone) zones in the plan. The transfer of Development
Rights shall be from intensely developed zone to other zones and not vice
versa.
Development Rights Certificate (DRC), whether transferable /
Inheritable:

If the owner of any land which is required for road widening for formation of new
roads or development of parks, play grounds, civic amenities etc. those proposed in the
plan shall be eligible for the award of Transferable Development Rights. Such award
will entitle the owner of the land in the form of a Development Rights Certificate
(DRC). Which he may use for himself or transfer to any other person.

Utilization of DRC:

1. The DRC so permitted may be utilized either at the remaining portion of the area
after
surrender which will be limited to a maximum of 0.6 times eligible floor area ratio
as additional floor area ratio in lieu of transfer of DRC, irrespective of road width.
2. The receiving plot shall abut not less than 12 mtr. wide road.
3. The receiving plot can utilize a maximum of 0.6 times the eligible FAR for that plot.
4. The utilization of DRC in favour of NRI or Foreign Nationals will be subject to
rules and regulations of the RBI.
5. The Authority may charge a fee of Rupees one hundred for grant / transfer
/utilization /revalidation etc., of DRC.
6. The TDR will be allowed to be utilized in multiples of 10 sq.mtrs only, except the
last remainder.
7. The instrument of utilization of DRC shall have to be executed by both the
parties – transferer and transferee.
8. For each request to utilize the DRC separate utilization form shall be submitted
to the Authority.
9. The utilization form requesting to utilize the DRC shall be valid for six months
from the date of issue of utilization form.
10. The DRC shall be valid for a period of 5 years. However, the same will be
revalidated for a further period of 5 years. The DRC shall however, shall lapse after
expiry of 10 years.
11. The Authority may reject / cancel the grant of DRC in the following
circumstances:
a) If any dues payable by the owners of the property to the State Government /
Local Authority, prior to the date of handing over physical possession of the
properties to the (Bangalore Mahanagara Palike) Authority.
b) Where DRC is obtained by fraudulent means,
c) Where there is a dispute on the title of the land, till settled by the competent
court.
Estimation OF urban Land –
Values
Contents:

 The Nature of Land and Natural Resources


Characteristics of Land
Land Rent Compared with Market Value
 Principles of Land Assessment
Utility, Scarcity and Desirability
Limitations on Land Ownership and Use
Factors that Contribute to Land Value
Highest and Best Use of Land
Procedures for Land Assessment
 THE NATURE OF LAND AND NATURAL
RESOURCES
Characteristics of Land
Land, in an economic sense, is defined as the entire
material universe outside of people themselves and
the products of people. It includes all natural
resources, materials, airwaves, as well as the ground.
All air, soil, minerals and water is included in the
definition of land. Everything that is freely supplied by
nature, and not made by man, is categorized as land.
Land holds a unique and pivotal position in social,
political, environmental and economic theory. Land
supports all life and stands at the center of human
culture and institutions. All people, at all times, must
make use of land. Land has no cost of production. It is
nature's gift to mankind, which enables life to
continue and prosper.
LAND RENT COMPARED WITH MARKET VALUE

 Land Market Value is the land rental value, minus land taxes, divided by
a capitalization rate. (1) Each of these terms is defined as follows:
 Land Rental Value is the annual fee individuals are willing to pay for the
exclusive right to use a land site for a period of time. This may include a
speculative opportunity cost.
 Land Taxes is the portion of the land rental value that is claimed for the
community.
 Capitalization Rate is a market determined rate of return that would
attract individuals to invest in the use of land, considering all of the risks
and benefits which could be realized.
 Land Market Value is the land rental value, minus land taxes, divided by a
capitalization rate.
 The mathematical relationship is then:

 Land Market Value = Land Rental Value - Land Taxes


Capitalization RateLand Rental Value = Market Value x Capitalization
Rate + Land Taxes
 For example, assume that the land rent for a site is $1,800, the land taxes
are $300 and the capitalization rate is 6%, what would the land market
value be?
 Land Market Value = Land Rental Value - Land Taxes
Capitalization Rate
 Land Market Value = $1,800 - $300
6% = $1,500
6% = $25,000What would result if a larger portion of the land rent were
collected? Let's consider $1,650 rather than $300.
 Land Market Value = $1,800 - $1,650
6% = $150
6% = $2500If any three factors are known, the fourth can be calculated.
The term land rental value can be used instead of market value, or vice
versa, in the discussion of land assessment systems.
PRINCIPLES OF LAND ASSESSMENT

An appraisal is essentially an expert opinion of the market value of a site;


the assessor must present one that is supportable and comprehensible.
The assessor must develop and use specific terminology suitable and
pertinent to land appraisal.
Land is the entire non-reproducible, physical universe, including all natural
resources. A land site includes everything within the earth, under its
boundaries and over it, extending infinitely into space. In addition to a
location for a house or building, a land site would include the minerals,
water, trees, view, sunshine and air space. The shape of the site can be
described as an inverted cone with its apex at the center of the earth and
extending upward through the surface into space.
LIMITATIONS ON LAND OWNERSHIP AND USE

 While land is the gift of nature, certain legal, political and social constraints
have been imposed in most societies throughout the years. Every nation
imposes certain public limitations on land ownership and use for the
common good of all citizens. Four forms of governmental control include:
 Taxation -- Power to tax the land to provide public revenue and to return
to the community the costs incurred to pay for the various public benefits,
services and environmental protection, which are provided by the
government;
 Eminent Domain -- Right to use, hold or take land for common public uses
and benefits;
 Police Power -- Right to regulate land use for the welfare of the public, in
the areas of safety, health, morals, general welfare, zoning, building codes,
traffic regulations and sanitary regulations;
 Escheat -- Right to have land revert to the public's agent, the government,
when taxes are not paid or when there are no legal heirs.
FACTORS THAT CONTRIBUTE TO LAND VALUE

 The physical attributes of land include quality of location,


fertility and climate; convenience to shopping, schools and
parks; availability of water, sewers, utilities and public
transportation; absence of bad smells, smoke and noise; and
patterns of land use, frontage, depth, topography, streets and
lot sizes.
 The legal or governmental forces include the type and amount
of taxation, zoning and building laws, planning and restrictions.
 The social factors include population growth or decline,
changes in family sizes, typical ages, attitudes toward law and
order, prestige and education levels.
 The economic forces include value and income levels, growth
and new construction, vacancy and availability of land. It is the
influences of these forces, expressed independently and in
relationship to one another, that help the people and the
assessor measure value.
PROCEDURES FOR LAND ASSESSMENT

An assessment (or an appraisal) is essentially an


opinion of value made by an experienced
knowledgeable person. Specialists are known as
assessors who base their estimate of land market
value, upon basic economic principles which serve as
the foundation of the valuation process. Anyone can
learn how to do this and learn to do it better.
 The assessment or appraisal process is an organized
procedural analysis of data. This procedure involves
six specific phases, each of which contains numerous
procedures.
Estimating the Market Values

 Once the analysis has been concluded, it will be possible for


the assessor to make a rational estimate of the market value
of every land site. This estimate will serve as the basis for the
value that will be paid by a site user for the exclusive use of a
location (site). The assessor would assign preliminary land
value estimates based upon the comparative estimated
usefulness and desirability of the sites. Initially, they could
accomplish this task in a general manner, with the
understanding that refinements would be made to reflect new
information and public opinion.
Public Examintion and Analysis of the Land Market Values

 The preliminary land value assessment, estimated for each


site, could then be displayed on a land market map. Public
examination and analysis of the land market values for land
sites would help to clarify any errors in assessments. People
who occupy land acquire skills in noticing slight differences in
land characteristics. They can explain to the assessor why and
how differences should be reflected in the conclusions about
land values.
 Once an adequate sample survey has been completed and had
favorable public review, the result can be used throughout the
total area. These sample data results could be used to
estimate the comparative markets of each land site.
 To ensure the optimal and equitable use of land sites, land
assessments should reflect the attitudes of the individuals
who can make the highest and best use of the site, who would
be willing to pay more than individuals with inferior uses in
mind.
METHODS USED TO ASSESS LAND VALUE

Three Approaches to Valuing Real Estate

 Valuation of the land involves first determining the highest and best use of
the site, estimating the value by current appraisal theory, and reconciling to
a final estimate of value.
 The first step in the valuation of land is determining the highest and best
use of the site. The four criteria that highest and best use must meet are:
physically possible, legally permissible, financially feasible, and maximally
productive. Two types of analyzes are made in determining the highest and
best use. The first is the highest and best use of the site, if vacant; the
second is the highest and best use of the site as improved, or if
undeveloped as proposed to be improved.
 There are three standard approaches to estimating market value that form
the foundation for current appraisal theory: the cost approach, the sales
comparison approach and the income approach.
Specific Methods Used in Appraising Land Value

 In the valuation process the land value estimate is a separate step


accomplished by applying either sales comparison or income capitalization
techniques. The most reliable way to estimate land value is by sales
comparison.When few sales are available or when the value indications
produced through sales comparison require substantiation, other
procedures may be used to value land. In all, seven procedures can be used
to obtain land value indications.
 Sales comparison -- Sales of similar, vacant parcels are analyzed,
compared, and adjusted to provide a value indication for the land being
appraised.
 Proportional Relationship -- Relating a site to a known standard site.
The difference can be expressed as a percentage. This procedure can be
used when their is little value evidence in existence.
 Land Residual Technique -- It is assumed that the land is improved to its
highest and best use. All operating expenses and the return attributable to
other agents of production are deducted, and the net income imputed to
the land is capitalized to derive an estimate of land value.
 Allocation -- Sales of improved properties are analyzed, and the
prices paid are allocated between the land and the improvements.
 Extraction -- Land value is estimated by subtracting the estimated
value of the depreciated improvements from the known sale price
of the property.
 Ground Rent Capitalization -- This procedure is used when land
rental and capitalization rates are readily available, as in well-
developed areas. Net ground rent -- the net amount paid for the
right to use and occupy the land -- is estimated and divided by a
land capitalization rate.
 Subdivision Development -- The total value of undeveloped land
is estimated as if the land were subdivided, developed, and sold.
Development costs, incentive costs, and carrying charges are
subtracted from the estimated proceeds of sale, and the net
income projection is discounted over the estimated period
required for market absorption of the developed sites.
Transfer of development rights
WHAT IS TDR?
 Transfer of Development Rights (TDR) means
making available certain amount of additional
built up area in lieu of the area relinquished or
surrendered by the owner of the land, so that
he can use extra built up area either himself
or transfer it to another in need of the extra
built up area for an agreed sum of money.
Purpose of TDR:
 The process of land acquisition in urban
areas for public purpose especially for
road widening, parks and play grounds,
schools etc., is complicated, costly and
time consuming. In order to minimize the
time needed and to enable a process,
which could be advantageously put into
practice to acquire land for reservation
purposes mentioned above.
Development Rights Certificate (DRC),
whether transferable / Inheritable:

 If the owner of any land which is required for


road widening for formation of new roads or
development of parks, play grounds, civic
amenities etc., those proposed in the plan
shall be eligible for the award of Transferable
Development Rights. Such award will entitle
the owner of the land in the form of a
Development Rights Certificate (DRC).
Which he may use for himself or transfer to
any other person.
Zones of TDR:

 Based on the intensity of development,


the city is divided into intensively
developed (A-zone), moderately
developed (B-zone) and sparsely
developed (C-zone) zones in the plan. The
transfer of Development Rights shall be
from intensely developed zone to other
zones and not vice versa.
How does it work?
 Planning regulations effectively represent the transfer of development rights into
public ownership. Local authorities, in turn, grant these rights to individual land
owners and developers in return for compliance with the rules laid down in the
planning regulations.
 With the Transferable Development Rights (TDR) mechanism, and owners
involved in transferring the development rights of a piece of land they own first
surrender the land to the local government. In return, they receive monetary
compensation or the development rights to another piece of land, equal to that
surrendered, in another area of the city.
 The mechanism is used by governments to acquire land that is later developed for
public use.
 If plots being transferred already have the services and/or buildings that local
government requires or can effectively use, then the landowner receives an
additional TDR equal to the service or built area being transferred.
 However, where the compensation takes the form of new land received in return
for the surrender of the original land, limitations are often placed on TDR plots in
order to constrain the amount of development that can occur within desired
planning.
 Through the consolidation and reorganization of the use of urban land, TDR brings
economic and social benefits and allows government to regain control over areas
of land, which can then be redeveloped for public use (i.e. public housing).
Benefits of TDR
 Having the TDR system in place it smoothens the acquisition
process & gives better compensation facility.
 The TDR concept leads to better city infrastructure at a
faster pace.
 Property owners who might lose a part of their land or
building are compensated by the provision to build one and a
half times the surrendered area on their existing property.
 The value FSI/FAR of their property in turn stands to
appreciate on account of the wider roads.
 As it provides more scope of affordable housing within city
limits due to the excess of built-up area on account of TDR
in city limits.
 Due to TDR concept public’s money can be used for better
road development.
 TDR process is a faster compensation method.
Air rights
 Some counties allow air rights to be
transferred to the surrounding buildings.
Thus in a dense downtown area, each
building in the area may have the right to
thirty-five stories of airspace. The owners
of an old building of only three stories
high could make a great deal of money by
selling their building and allowing a thirty-
five story skyscraper to be built in its
place. To avoid the loss of historically
interesting buildings, the government may
instead choose to permit developers to
purchase the unused air rights of nearby
land. In this case, a skyscraper developer
may purchase the unused 32 stories of air
rights from the owners of the historic
building, allowing them to build a
skyscraper to a total height of
35 + 32 = 67 stories. This will allow the
historic building owners to make almost
as much money, if not more, without
demolishing their building
UNIT 11
Cost and cost indices
preliminary for building.

11-Apr-19 A ppt on Economics 178


The quarterly construction price and cost indices
(PCIs) are produced for use in estimating, cost
checking and fee negotiation on public sector
construction works. The Cost Indices are
incorporated in the National and the State
construction agencies, such as the Central Public
Works Department and State Public Works
Department. They are used as benchmarks with
discounted/escalated Schedule of Rates.
Refer the attached file BldngCstIndcs (Building
Cost Indices)

11-Apr-19 A ppt on Economics 179


UNIT 12
Concepts of life cycle costing
with reference to buildings. Time
value of money-present worth
and inflation. Sources of finance
for buildings.

11-Apr-19 A ppt on Economics 180


definition of life cycle costing
 Life cycle cost: ‘the cost of an asset, or its
parts throughout its life cycle, while
fulfilling the performance requirements’
(ISO 15686-5)

 Life cycle costing: ‘methodology for


systematic economic evaluation of life
cycle costs over a period of analysis as
defined in the agreed scope’ (ISO 15686-
5)
definition of life cycle costing

Life cycle costing is therefore


 an economic evaluation method
 that accounts for all relevant costs
 over the investor’s time horizon
 adjusting for the time value of money
where appropriate
why do we need LCC?

A building is for life not just for the opening ceremony


applications
 Outline business case (OBC) – option
appraisal – issues of comparing like for
like
 Final business case – cash flow forecast
prediction of the future based upon one
option – issues of loans, sinking funds,
cash flow smoothing, etc
 Investment for return – measures of
economic performance, payback, internal
rate of return
LCC is scaleable
 The principles are the same whenever
and why ever you do it
 They are the same for option appraisal of
a whole building or an individual
component
 They are the same for setting a major
replacement budget for a new building or
a maintenance budget on an existing one
LCC is simple?
LCC asks these simple questions:
 What do I need now and how much will it cost
me?
 What will I need to do in the future because I
have done it and how much will that cost me?
 How long is the ‘future’?
 How do I evaluate future costs v current costs?

However…..
LCC is
complicated?
……..buildings are complicated

……..and client’s needs can be downright confusing!


sustainability
Life Cycle costing is an economic evaluation
method

It is about the ‘for money’ in the ‘best value


for money’ equation
sustainability
Exclude
 Externalities ie other people’s costs
eg Occupiers’ costs if the client is a
developer

 Intangibles ie other impacts that do


not have a directly measurable cost
eg Carbon emissions or Quality of
life
sustainability
Include
 Actual savings that accrue to the
client
 Tax savings
 Grants
 Value of tradable benefits
 Income from energy generation
life cycle analysis (LCA)
Life Cycle Analysis
 Enables decisions to be made on the basis
of potential environmental impacts by
scoring and rating on environmental
criteria. Whilst costs can be firmly
attributed to some environmental factors
there is currently no widely agreed
methodology for others and some cannot
be quantified at all in cost terms.
BCIS/BSi SMLCC
BCIS/BSi SMLCC
comparing like with like
Three requirements:
1. relevant costs
2. time horizon
3. discount rate
What to include

 Construction costs (year zero costs)


◦ Construction, fees, decanting etc

 Maintenance costs and cycles


◦ Major replacement, minor replacement, redecorations etc

 Operation costs and cycles


◦ Cleaning, energy, administration etc

 Occupancy costs
◦ Reception, catering, occupants security etc

 End of life costs


◦ Disposal, reinstatement, continued value etc
What to exclude?
 Externalities ie Other peoples costs
eg Occupiers costs if the client is a
developer

 Intangibles ie Other impacts that do not have a directly measurable


cost
eg Carbon emissions
or Quality of life

 The LCC may well form part of a larger study that will incorporate
these things but the LCC should represent the cost to the investor
only.
Time Value of Money Rules
 Financial decisions often require combining cash
flows or comparing values. To do so:
 First: It is only possible to compare or
combine values at the same point in time.
◦ A dollar today is worth more than a dollar in the
future, because you can invest it and earn interest.
◦ Money at different points in time has distinctly
different values.
Time horizon
 The period for which the investor has an
interest in the building’s life
◦ the use period
◦ PPP/PFI period
◦ portfolio management/asset management
◦ cradle to grave
◦ investment period with ongoing intent to occupy

 Building life
NPV

How do you compare future costs with


current costs?

Net Present Value (NPV)


present value

Defined as:
The amount to be invested in the bank today to pay for all future costs at a
given interest rate over a known time horizon.

Example:
How much is required to be invested in the bank today at 3.5% to pay for a
replacement pump costing £400 which is anticipated to fail in year ten.
Answer = £284
present value
formula

If
A  P  (1  i) n

then
A
P
(1  i ) n

Where A=future amount, P=amount invested, i= discount rate


Time Value of Money Rules

 In general, to move a cash flow C backward n


periods at an interest rate of r per period,
compute its present value (PV):
C
PV=
(1  r ) n

 Example: A bond will pay $15,000 in ten years.


If the interest rate is 6% per year, what is the
bond worth today?
PV= 15, 00010  $8375.92
(1  .06)
Time Value of Money Rules
 Second: To move a cash flow forward in time,
you must compound it.
 Example: The current interest rate is 10% per
year, and you have $1000 today to invest for 2
years.
 On a timeline:
0 1 2

$1000 $1100 $1210


 1.10  1.10

 During the first year you earn $100 in interest,


but during the second year you earn more.
◦ Compound interest: earning interest on interest.
Time Value of Money Rules

 The value of a cash flow that is moved forward


in time is its future value (FV).
 The future value (FV) of a cash flow today (C)
at an interest rate r, n periods in the future is
FVn=C(1+r)n
 Example: You have $500 today, and the interest rate
is 4% per year. What is the future value of this cash
flow 3 years from today?
FVn=C(1+r)n =500(1+.04)3=$562.43
Time Value of Money Rules
 Third: To move a cash flow back in time, we
discount it.
◦ The interest rate we use is therefore also called the
discount rate.
 Suppose you anticipate receiving $1000 two
years from today, you can work backward by
dividing by (1+r) each year.
0 1 2

$826.45 $909.09 $1000


 1.10  1.10
SOURCES FOR BUILDING FINANCE
Conventional sources of finances for
Buildings include the Banks, personal savings,
Cooperatives against guarantee and
mortgages of personal assets and capacity
for repayments.
There are also other unconventional means
as in attached file PPPFnncInfraBldng (Public
Private Partnership for financing Infrastructure
and Building Projects)

11-Apr-19 A ppt on Economics 207

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