Professional Documents
Culture Documents
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.
• 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.
• 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..
Unlimited wants.
Limited resources.
Alternative applicability of resources.
The problem of choice.
13
Economics as a Science of Wealth : Classical View:
Definition of Economics By Adam Smith:
Scarcity
The resources we use to produce goods and services are
limited.
Economics
The study of choices when there is scarcity.
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
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.
• 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.
41
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.
42
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.
43
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.
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.
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.
Any particular want is satiable: Though the wants are unlimited, but it is
possible to satisfy a particular want, provided has the means (resource).
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
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.
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.
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.
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
WHAT IS TDR?
Purpose of TDR:
Types of TDR
Zones of TDR:
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:
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:
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
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
However…..
LCC is
complicated?
……..buildings are complicated
Occupancy costs
◦ Reception, catering, occupants security etc
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
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