Construction Microeconomics

Christian Brockmann is Professor (Lecturer) of Construction Engineering at the University of Utah, USA. He holds a PhD in construction management from ETH Zurich (Switzerland) and a PhD in Economics from TU Freiberg (Germany). With over 20 years’ experience in the management of major infrastructure projects as a contractor and consultant, Christian was Project Director for the BangNa Expressway in Thailand and the Port Said Tunnels in Egypt, (both $2b+ projects), and was part of the Owner’s Project Management Team for the Qatar Integrated Railway Project (a $40b+ project).

• Foreword by Gerard de Valence xixPreface xxiReferences xxvi1 Introduction 1 1.1 Navigating the Maze of Economic Literature 21.1.1 Economics 21.1.2 Microeconomics 31.1.3 Macroeconomics 41.1.4 Construction Economics 41.2 Tools and Presentations 51.2.1 Definitions 51.2.2 Economic Scholars 61.2.3 Assumptions 61.2.4 Case Studies 61.2.5 Observations 71.2.6 Summaries 71.3 Methodological Approach 81.3.1 Laws and Regularities 81.3.2 Focus and Goals 111.3.3 Descriptive and Normative Economics 121.4 Theoretical Background 131.4.1 Industrial Economics 13 1.4.2 New Institutional Economics 141.4.3 Game Theory 151.4.4 Auction Theory 161.4.5 Behavioral Economics 161.4.6 Economics of Information 171.4.7 Law and Economics 171.5 What You Can and Cannot Expect 171.6 Audience 191.6.1 Students 191.6.2 Lecturers 19 1.6.3 Academics 191.6.4 Contractors 191.6.5 Owners 201.6.6 Policymakers 201.7 Structure of the Text 201.7.1 Basic Economic Principles 201.7.2 Consumers in Perfectly Competitive Markets 211.7.3 Producers in Perfectly Competitive Markets 211.7.4 Interaction in Perfectly Competitive Markets 211.7.5 Imperfect Markets 221.7.6 Factor Markets 221.7.7 Information, Risk, and Uncertainty 221.7.8 Game Theory and Auctions 231.7.9 Construction Sector 231.7.10 Theory of the Owner 231.7.11 Theory of the Contractor 241.7.12 Construction Goods 241.7.13 Construction Markets 241.7.14 Contracting 251.7.15 Market Imperfections 251.7.16 Government 251.7.17 Public Construction Goods 261.7.18 Conclusion 261.7.19 Synopsis 26References 27Part I Microeconomics 31 2 Basic Economic Principles 33 2.1 Consensual Ideas 352.2 Scarcity and Choice 362.3 Decision-Making 392.3.1 Opportunity Costs 392.3.2 Incentives 402.3.3 Marginal Decisions 412.4 Markets 412.5 Trade and Comparative Advantage 44  2.6 Government 47References 483 Consumers in Perfectly Competitive Markets 51 3.1 Perfectly Competitive Markets 533.2 Consumer Behavior 553.2.1 Budget Constraint 553.2.2 Preferences and Utility Functions 563.2.3 Utility Maximization 603.3 Demand Curve 623.4 Further Reading 64References 654 Producers in Perfectly Competitive Markets 67 4.1 Producer Behavior 684.2 Production Theory 704.2.1 Technology 714.2.2 Production Functions 754.2.2.1 Classical Production Function 774.2.2.2 Neoclassical Production Function 794.2.2.3 Limitational Production Function 824.2.2.4 Technological Change (Innovation) and Learning 834.3 Cost Theory 854.3.1 Cost Curves for Classical Production Functions 864.3.2 Cost Curves for Neoclassical Production Functions 884.3.3 Cost Curves for Limitational Production Functions 894.3.4 Simplified Cost Function with Constantly Increasing Variable Costs 894.3.5 Long-Run Cost Curves 914.4 Supply Curve 924.4.1 Short-Run Supply Curve of a Firm 924.4.2 Long-Run Supply Curve of a Firm 944.4.3 Market Supply Curve 94References 955 Interaction in Perfectly Competitive Markets 97 5.1 Equilibrium Price and Quantity 995.2 Comparative Statics 1015.3 Elasticities of Demand and Supply 1025.4 Consumer and Producer Surplus 1065.5 Time-Dependent Supply Curves and Market Outcomes 1075.5.1 Very-Short-Run Supply Curve 1085.5.2 Short-Run Supply Curve 1085.5.3 Long-Run Supply Curve 1095.6 Welfare 1105.7 Efficiency and Equity 112References 1136 Imperfect Markets 1156.1 Monopoly 1176.1.1 Normal Monopolies 1186.1.2 Natural Monopolies 1206.2 Monopolistic Competition 1216.3 Monopsony 1246.4 Oligopoly 125References 1267 Factor Markets 129 7.1 Factor Supply of Households 1317.1.1 Labor Supply 1317.1.2 Capital Supply 1337.2 Factor Demand of Firms 1357.3 Demand and Supply on Factor Markets 137References 1378 Uncertainty, Risk, and Information 139 8.1 Uncertainty and Risk 1408.1.1 Risk Attitudes 1418.1.2 Risk Strategies 1428.1.3 Transaction Cost Theory 1448.2 Information 1468.2.1 Satisficing Model of Decision-Making 1468.2.2 Asymmetric Information 1498.2.2.1 Principal–Agent Theory 1498.2.2.2 Market Breakdown Due to Asymmetric Information 1498.2.2.3 Hidden Characteristics and Adverse Selection 1508.2.2.4 Hidden Intentions and Holdup 1518.2.2.5 Hidden Action and Moral Hazard 1528.2.3 Property Rights Theory 153References 1539 Game Theory and Auctions 1559.1 Game Theory 1569.1.1 Basics of Game Theory 1579.1.2 Static Games with Complete Information 1599.1.3 Dynamic Games with Complete Information 1609.2 Auctions 1619.2.1 Basics of Auctions 1619.2.2 English and Vickrey Auctions 1639.2.3 Dutch Auctions and Sealed-Bid Auctions 1649.2.4 Competitive Bidding 164References 167Part II Applied Construction Microeconomics 169 10 Construction Sector 171 10.1 Definition 17210.2 Economic Contribution 17410.2.1 Value-Added Concept 17410.2.2 Investment Concept 17610.2.3 Multiplier Concept 17710.3 Actors in the Construction Sector 17910.3.1 Market Demand 18110.3.2 Market Supply 18310.4 Summary of the Construction Sector 185References 18611 Theory of the Owner 189 11.1 The Owner as an Entity 19011.1.1 Terminology 19011.1.2 Images and Prejudices 19111.1.3 Organization 19211.2 Tasks of the Owner 19411.3 Behavior of the Owner 19511.3.1 Consumers Buying Construction Goods 19511.3.2 Producers Buying Construction Goods 19611.4 Information of the Owner 19711.5 Developing a Contract 19811.6 Procurement of a Contractor 19911.7 Supervision of the Construction Process 20211.8 Summary 203References 20312 Theory of the Contractor 20512.1 The Contractor as an Entity 20512.1.1 Cooperation 20612.1.2 Organization 20712.2 Tasks of the Contractor 20812.3 Behavior of the Contractor 20912.3.1 Strategy 21112.3.2 Legal Organization 21212.3.3 Growth of the Firm 21412.4 Information of the Contractor 21512.5 Bidding 21612.6 Contractor Pricing 21712.7 Production 22012.7.1 General Characteristics 22012.7.2 Production Determinants 22212.7.2.1 Production Line, Work Shop, Site Construction, Parallel, or Variable Production 22212.7.2.2 Automatization 22412.7.2.3 Mass or Single-Item Production 22512.7.2.4 Continuous and Discontinuous Production 22512.7.2.5 Summary of Production Types 22612.7.3 Production Functions and Cost Curves 22812.7.4 Production Decisions 23312.8 Summary 234References 23413 Construction Goods 237 13.1 Goods and Services 23713.1.1 Heterogeneity 23813.1.2 Construction Goods as Transitional Performance Bundles 24013.1.3 Construction Goods as Contract Goods 24213.1.4 Construction Goods as Investment 24413.1.5 Construction Goods as Services 24413.1.6 Summary of the Characteristics of Construction Goods 24613.2 Typology of Construction Goods 24713.2.1 Approach to Developing a Typology 24813.2.2 Conceptualization 24813.2.2.1 Choice of Dimensions 24913.2.2.2 Typical Cases 25013.2.2.3 Typology 25013.2.3 Applications 25313.2.3.1 Market Entry 25313.2.3.2 Optimum Firm Size 25313.2.3.3 Strategic Planning 25513.3 Summary 256References 25614 Construction Markets 259 14.1 Characteristics of Markets 25914.2 Particularities of Construction Markets 26114.2.1 Goods 26114.2.2 Owners 26214.2.3 Markets 26214.2.4 Summary 26314.3 Analysis of Construction Markets 26314.3.1 Heterogeneity 26514.3.1.1 Observation 26614.3.1.2 Theory 26614.3.1.3 Organization 26614.3.1.4 Structure 26614.3.1.5 Specialization 26714.3.1.6 Law 26714.4 Owners 26814.5 Contractors 26814.5.1 Supply 26814.5.2 Information 26914.6 Geography of Construction Markets 27014.6.1 Regional Markets 27114.6.2 National Markets 27414.6.3 International Markets 27914.6.4 Multinational Markets 28014.6.5 Global Players and Global Markets 28314.7 Entry and Exit Barriers 28514.7.1 Effects of the Business Cycle 28614.7.2 Number of Exits and Entries 29014.8 Summary 292References 29315 Contracting 297 15.1 Construction Goods 29815.2 Construction Markets 30015.3 Owner’s Demand 30115.4 Contractor’s Supply 30215.5 Construction Contracts 30315.6 Contracting Market Design 30515.7 Pricing of Construction Contracts 30715.7.1 Marginal Cost Decisions Versus Markup Pricing 30815.7.2 Auctioning 31015.7.2.1 Construction Goods and Auctions 31015.7.2.2 Auction Designs 31215.7.3 Sealed-Bid Auctions 31515.7.3.1 Pricing in Sealed-Bid Auctions 31615.7.3.2 Pricing bias 31615.7.3.3 Information Bias 31715.7.3.4 Uncertainty Bias 31815.7.3.5 Technology Advance 31915.8 Supply and Demand in Construction 31915.9 The Owner as Monopsonist 32015.10 Bargaining for the Contract Price 32215.11 Change Orders and Claims 32515.12 Summary 326References 32716 Market Imperfections 329 16.1 Imperfect Information 32916.2 Externalities 33116.3 Collusion and Corruption 33416.3.1 Collusion 33416.3.1.1 Naturally Caused Collusion 33616.3.1.2 Artificially Caused Collusion 33716.3.2 Corruption 33816.4 Mechanics or Ethics of Collusion 34016.5 Conclusion 341References 34217 Government 343 17.1 Government as Actor on Markets 34417.2 Taxes and Subsidies 34617.3 Regulations 34817.4 Interest Rates 35017.5 Inflation 353 References 35418 Public Goods 35518.1 Characteristics of Private Goods 35618.1.1 Rivalry 35718.1.2 Excludability 35818.2 Theory of Public Goods 35918.2.1 Demand of a Public Good Based on Utility 36018.2.2 Demand for a Public Good Based on Willingness to Pay 36118.3 Free Riding 36218.4 Cost–Benefit Analysis 36318.5 Construction Goods as Public Goods 36318.6 Strategic Misrepresentation and Optimism Bias 364References 36519 Conclusion 367 19.1 Methodical Context 36719.2 Owners 36919.3 Contractors 37019.4 Construction Goods 37119.5 Construction Markets 37119.6 Contracting 373References 374Index 375