3. INTRODUCTION
Development Economics :
is a subject dealing with the concepts,
skills, methods and techniques of
economics in order to support
decisions made by investors ,
implementing agents, etc.; through
indicating the feasibility and priority
of their engagements in construction
related businesses.
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4. Economics:- is concerned with choices made in a
competitive environment under the constrained of limited
resource
Cost awareness need to be build in the majority and decisive
professionals, stakeholders of the construction industry: such as
Architects, Civil Engineers, Construction Management,
Construction Technology and Urban Planning professionals;
Consultants and Contractors.
To enable such professionals, stakeholders to acknowledge their
limits to the discipline and when to involve Economists and able
to work with them interactively.
Why Economics?
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5. To create awareness that all construction projects are:
• Components of a certain business;
• Constrained by Cost, Time, Scope and Quality
requirements;
• Key to economic development;
To create awareness that construction industry is the
most affected during economic imbalances or crises.
Decision of investments based on the above
requirements called for the importance of
Construction economics.
Why Economics?
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6. Therefore the following basic economics principles are vital to
support such decisions:
1) Supply and Demand
a. Supply and Demand definitions .
b. Economic efficiency and optimization .
2) ECONOMIC DECISION-MAKING.
a. Out-of-pocket commitment comparison,
b. Payback period
c. Average annual rate of return’ methods
3) Time Value of Money
4) Cash Flow Diagrams
5) Evaluation of public projects:
a. Discussion on benefit-cost ratio
Basic Economics Principles
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7. Supply and Demand
Supply:- is the amount of products (services, goods and
works) that producers / suppliers are willing or making
available for sell in the market.
Demand:-is the amount of products (services, goods and
works) that buyers are willing or able to buy from the
market.
Basic Economics Principles
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8. Simple Supply Demand Curve
Quantity
Price
Supply
Demand
Greater Quantity is demanded when
prices are lower.
More products are produced when
prices are lower..
Basic Economics Principles
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ECONOMIC DECISION-MAKING
The Problems of present economy —such as
(a) Comparison of designs or elimination of over–design;
(b) Designing for economy of production/maintenance/transportation;
(c) Economy of selection and perfection
(d) Economy of relative size and location
(e) Economy and standardization and simplification—
In which an engineer has to take a decision among the
competing alternatives.
The three most common methods of evaluation—
(a)Out-of-pocket commitment’ comparison,
(b) Payback period’, and
(c) The ‘average annual rate of return’ methods
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COMMON EVALUATION METHOD WHEN TIME VALUE OF MONEY IS
NOT CONSIDERED
A. Out of Pocket Commitment : The out of pocket commitment
is the total expense required for an alternative.
B. Pay Back Period: The pay back period for an investment is the
number of years it takes to repay the original invested capital.
C. Average Annual Rate of Return: The alternatives are
evaluated on the basis of only the average rate of return as
expressed in terms of a percentage (of the original capital).
CONT…..
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Monetary units (birr, dollar, etc.) serve as an excellent tool to
compare incomparable things,
e.g., a bag of cement and tons of sand,
We know that the real worth of a certain amount of money is
not invariant on account of factors such as inflation, dynamic
interactions between demand and supply, etc.
Money can have different values at different times. This is
because money can be used to earn more money between the
different instances of time.
Time Value of Money
12. Time value of money because
• Buying power of future money is less than today’s money due
to inflation.
• Today’s money can be used for investment and most likely
brings profit depending of the rate of return upon different
businesses
• Comparison of today’s and future money can be made in
order to support decision when to invest money.
• Comparison of different investment options whose
expenditures differ in time using the same time framework.
Time Value of Money
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13. CASH-FLOW DIAGRAMS
Any organization involved in a project receives and
spends different amounts of money at different points in time,
and a cash-flow diagram is a visual representation of this
inflow and outflow of funds.
The graphic presentation of the costs and benefits over the
time is called the cash flow diagram.
This is the time profile of all the costs and benefits.
It is a presentation of what costs have to be incurred and
what benefits are received at all points in time.
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14. 3/22/2022 14
Although in practice this inflow and outflow does not
necessarily follow any pattern, it is sometimes assumed that all
transactions (inwards or outwards) take place either at the
beginning or end of a particular period, which may be a week, a
month, a quarter, or a year, simply to simplify the analysis.
The following conventions are used in the construction of
the cash flow diagram:
The horizontal axis represents time
The vertical axis represents costs and benefits
Costs are shown by downward arrows
Benefits are shown by upward arrows
CASH-FLOW DIAGRAMS
15. In a cash-flow diagram , usually time is drawn on the
horizontal (X) axis in an appropriate scale, in terms of weeks,
months, years, etc., whereas the Y-axis represents the amount
involved in the transaction.
Cont…
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