Sociology &

Building Economics
Economics

Salila Vanka
WCFA Odd Semester 2023-24
Course Outline
Module 3
7. Economics: Definition of economics; Definitions of terms: Goods; Utility, Value, Price and Wealth. The
relationship of economics with the built environment and land use.

8. Economic organization of society: Different economic systems: capitalism; socialism, communism, mixed-
economies. Primary, secondary and tertiary sectors of economy: agriculture, mining, manufacturing, banking,
marketing, transport and service sectors. Factors of production: land, labour, capital and entrepreneurship.
Relevance of factors of production to architecture and construction practice.

Module 4
9. Economics and the market: Consumption, wants and needs and their characteristics. Concepts of economics:
Opportunity cost; Laws of supply and demand; Laws of increasing, diminishing and constant returns; Standard of
living. Analysis of the housing market in Indian cities to understand the dynamics of urban housing supply and
demand.
Course Outline
Module 5
10. Urban land values: Various factors affecting the value of urban land. Difference between land use and land
cover. The characteristics of developed land in the city. The Bid Rent theory that defines relationship between
location and land value. Theoretical city models based on land use and land value – Burgess’s Concentric Zone
Theory; Hoyt’s Sector Theory; Ullman and Harris’s Multiple Nuclei Theory.

11. Building Costs: Cost and cost indices. Life cycle costs. Total cost of construction. Time value of money.
Different sources of financing buildings.

Suggested References

Openstax College (2012) Introduction to Sociology. Openstax College.

Samuelson, P. and Nordhaus, W. (2010) Economics. Mcgraw-Hill Education.
Yin, Robert K. (2014) Case Study Research Design and Methods (5th Ed.). Thousand Oaks, CA: Sage.
Groat, Linda N. and David Wang (2013) Architectural Research Methods (2nd Ed.). John Wiley & Sons.
Jones, Paul (2011). The Sociology of Architecture: Constructing Identities. Liverpool University Press.
Mann, Thorbjoern (1992) Building Economics for Architects. Wiley.
Neoclassical Economics
BREAKING DOWN 'Neoclassical Economics'
The term neoclassical economics was officially coined in 1900. Neoclassical economists believes that a consumer's
number-one concern is to maximize personal satisfaction, and that everyone makes decisions based on fully informed
evaluations of utility. This theory coincides with the idea of rational behavior theory, which states that people act rationally
when making economic decisions.
Further, neoclassical economics stipulates that a good or service often has value that goes above and beyond its input
costs. For example, while classical economics believes that a product's value is derived as the cost of materials plus the
cost of labor, neoclassical practitioners say that consumers have a perceived value of a product that affects its price and
demand.
Finally, this economic theory states that competition leads to an efficient allocation of resources within an economy. This
resource allocation establishes market equilibrium between supply and demand.
Arguments Against Neoclassical Economics
Since its inception, neoclassical economics has grown to become the primary take on modern-day economics. Although it
is now the most widely taught form of economics, this school of thought still has its detractors. Most criticism points out
that neoclassical economics makes many unfounded and unrealistic assumptions that do not represent real situations. For
example, the assumption that all parties will behave rationally overlooks the fact that human nature is vulnerable to other
forces, which can cause people to make irrational choices.
Therefore, many critics believe that this approach cannot be used to describe actual economies. Neoclassical economics is
also sometimes blamed for inequalities in global debt and trade relations because the theory holds that such matters as
labor rights will improve naturally, as a result of economic conditions.
Source: www.investopedia.com/terms/n/neoclassical.asp
Price
The amount of money that has to be paid to acquire a given product.

• Insofar as the amount people are prepared to pay for a product represents its value, price is also a
measure of value.

• So long as they are not artificially controlled, prices provide an economic mechanism by which
goods and services are distributed among the large number of people desiring them.

• Prices also act as indicators of the strength of demand for different products and enable producers
to respond accordingly. This system is known as the price mechanism and is based on the principle
that only by allowing prices to move freely will the supply of any given commodity match demand.

• If supply is excessive, prices will be low and production will be reduced; this will cause prices to rise
until there is a balance of demand and supply.

• In the same way, if supply is inadequate, prices will be high, leading to an increase in production
that in turn will lead to a reduction in prices until both supply and demand are in equilibrium.
SourceL Britannica , https://www.britannica.com/topic/price-economics
Price vis-à-vis Supply and Demand / Markets
The price system provides a simple scale by However
which competing demands may be weighed by • A totally free and unfettered price mechanism
every consumer or producer. does not exist in practice.
• Even in relatively free market economies of the
Prices .. developed Western world there are different
1) determine what goods are to be distortions - monopolies, government interference
produced and in what quantities and so on
2) determine how the goods are to be • The distortions reduce the efficiency of price as a
produced determinant of supply and demand.
3) determine who will get the goods. The • In centrally planned economies, the price
goods so produced and distributed may mechanism may be supplanted by centralized
be consumer items, services, labour, or governmental control for political and social
other salable commodities. In each reasons.
case, an increase in demand will lead to • Attempts to operate an economy without a price
the price being bid up, which will mechanism usually result in surpluses of unwanted
induce producers to supply more; a goods, shortages of desired products, black
decrease in demand will have the markets, and slow, erratic, or no economic growth.
reverse effect.
SourceL Britannica , https://www.britannica.com/topic/price-economics
Cost
An amount that has to be paid or given up in order to get something. In business, cost
is usually a monetary valuation of (1) effort, (2) material, (3) resources, (4) time and
utilities consumed, (5) risks incurred, and (6) opportunity forgone in production and
delivery of a good or service. All expenses are costs, but not all costs (such as those
incurred in acquisition of an income-generating asset) are expenses.
Source: http://www.businessdictionary.com/definition/cost.html
Income

Money that an individual or business receives in exchange for providing a good or

service or through investing capital.

• Income is consumed to fuel day-to-day expenditures

• Most people aged 65 and under receive the majority of their income from a salary or wages
earned from a job
• Investments, pensions and Social Security are primary sources of income for retirees
• In businesses, income can refer to a company's remaining revenues after all expenses and taxes
have been paid. In this case, it is also known as "earnings“
• Most forms of income are subject to taxation.

Source: Investopedia
Wealth

A measure of the value of all of the assets of worth owned by a person, community,
company or country. Wealth is found by taking the total market value of all the
physical and intangible assets of the entity and then subtracting all debts.

• Essentially, wealth is the accumulation of resources.

• People are said to be wealthy when they are able to accumulate many valuable resources or
goods.
• Wealth is expressed in a variety of ways.
• For individuals, net worth is the most common expression of wealth, while countries measure
by gross domestic product (GDP) or GDP per capita.”

Source: Investopedia
Difference between Income & Wealth

Source: http://www.tutor2u.net/economics/reference/income-and-wealth
Value/ Economic Value / Market Value
Value
The worth of a good or service as determined by people’s preferences and the tradeoffs they choose
to make given their scarce resources, or the value the market places on an item.

Economic value is represented by the maximum amount a consumer is willing to pay. The economic
value of an asset is based on individual preferences. The same asset may have significantly different
economic values for two different companies or individuals. For businesses, economic value
represents the value that the company derives from using the asset.
(http://www.investopedia.com/ask/answers/061615/what-difference-between-economic-value-and-market-value.asp).

In contrast, market value represents the minimum amount a consumer will pay. Market value is based
on supply and demand. (http://www.investopedia.com/ask/answers/061615/what-difference-between-economic-value-and-market-value.asp).

How people choose to spend their income and their time determines a good or service’s economic
value.

Economic value is not static, but changes when the price or quality of similar items changes. For
example, if the price of milk increases, people may not only buy less milk, but also less cereal.
Economic Value / Market Value

The difference between market value and economic value is that

the former represents the minimum amount the customer is
willing to pay for an asset while the latter represents the
maximum amount that the customer is willing to pay. They are
different valuations based on different criteria. - Investopedia
Utility

• Because of scarcity, economies need to allocate their resources efficiently.

• Underlying the laws of demand and supply is the concept of utility, which
represents the advantage or fulfillment a person receives from consuming a good
or service.

Utility, then, explains how individuals and economies aim to gain optimal satisfaction
in dealing with scarcity.

- Investopedia
Utility
An economic term referring to the total satisfaction received from
consuming a good or service.

The economic utility of a good or service is important to understand because it will directly influence the demand,
and therefore price, of that good or service. A consumer's utility is hard to measure, however, but it can be
determined indirectly with consumer behavior theories, which assume that consumers will strive to maximize their
utility.

• Utility is an abstract concept rather than a concrete, observable quantity.

• The units to which we assign an "amount" of utility, therefore, are arbitrary, representing a relative
value.

- Investopedia
Total Utility

Total utility is the aggregate sum of satisfaction or benefit that an individual gains from
consuming a given amount of goods or services in an economy.

OR

Total utility (TU) is defined as the total amount of satisfaction that a person can receive
from the consumption of all units of a specific product or service.

• The amount of a person's total utility corresponds to the person's level of consumption.
• Usually, the more the person consumes, the larger his or her total utility will be.

- Investopedia
Marginal Utility

Marginal utility (MU) is defined as the additional utility gained from the consumption
of one additional unit of a good or service.

OR

Marginal utility is the additional satisfaction, or amount of utility, gained from each
extra unit of consumption.

- Investopedia
Utility – Example

This table shows that total utility will increase at a much slower rate as marginal
utility diminishes with each additional bar. Notice how the first chocolate bar gives
a total utility of 70 but the next three chocolate bars together increase total utility
by only 18 additional units.
- Investopedia
Utility
• In order to determine what a consumer's utility and total utility are,
economists turn to consumer demand theory, which studies consumer
behavior and satisfaction.
• Economists assume the consumer is rational and will thus maximize his or her
total utility by purchasing a combination of different products rather than
more of one particular product.
• Thus, instead of spending all of your money on three chocolate bars, which
has a total utility of 85, you should instead purchase the one chocolate bar,
which has a utility of 70, and perhaps a glass of milk, which has a utility of 50.
This combination will give you a maximized total utility of 120 but at the same
cost as the three chocolate bars.

- Investopedia
Economic systems

Collins, k. Exploring Business, http://catalog.flatworldknowledge.com/bookhub/7?e=collins-ch01_s03

Different types of economic systems

CSEC POB, https://canvas.instructure.com/courses/884981/pages/types-of-economic-systems

Different types of economic systems
Capitalism
• Under capitalism (market system), each individual or business works in its own interest
and maximizes its own profit based on its decisions.
• A market economy is one where the allocation of resources and the trading of goods
and services are through the decentralized decisions of many firms and households.
• Prices and the willingness of the market to pay those prices determines economic
output, which, in turn, determines the allocation of resources.
• The market system fosters competition that generally produces the most efficient
allocation of resources. In pure capitalism, also known as laissez-faire (“let it be”)
capitalism, the government's role is restricted to providing and enforcing the rules of
law by which the economy operates, but it does not interfere with the market.
• The essential characteristics of capitalism are that:
• the factors of production are privately owned;
• economic transactions take place in markets, where buyers and sellers interact;
• businesses and employees are free to pursue their own self-interest.
- http://thismatter.com/economics/economic-systems.htm
Different types of economic systems
Communism - Communism, also known as a command system, is an economic
system where the government owns most of the factors of production and decides
the allocation of resources and what products and services will be provided.

The most important originators of communist doctrine were Karl Marx and Frederick Engels. Like the
socialists before them, they wanted to end the exploitation of the masses by the few. The end goal of
communism was to eliminate class distinctions among people, where everyone shared equally in the
proceeds of society, when government would no longer be needed.

The centrally planned economy had the following major attributes:

The government owns all means of production, which is managed by employees of the state.
These employees operated under party-appointed economic planners, who set output targets in
prices and frequently interfered with the operations to satisfy personal or party desires.
And because communist economies are not efficient and because of the Communist Party's desire
to retain power, most economic resources were devoted to industrialization and to the military,
depriving consumers of food and other necessary products, causing intense competition for these
limited necessities, where many people had to wait in long lines for common consumer goods, such
as toilet paper. - http://thismatter.com/economics/economic-systems.htm
Different types of economic systems
Socialism - A way of organizing a society in which major industries are owned and
controlled by the government rather than by individual people and companies.

The definition of socialism varies widely, but it can be described as an economic system between
communism and capitalism.
Like communism, socialism seeks to redistribute the wealth more equitably by the communal
ownership of natural resources and major industries, such as banking and public utilities.
Socialists also seek to nationalize monopolies, which greatly enrich their owners at the expense of
the proletariat.
However, unlike communism, most small or nonessential enterprises would remain privately owned.

- http://thismatter.com/economics/economic-systems.htm
Economic Sectors of Production

Source: https://www.e-education.psu.edu/geog597i_02/node/840
Inputs & Outputs
Every society must make decisions about the economy’s inputs and outputs.

Inputs are commodities that are used to produce goods and services.

An economy uses its existing technology to combine inputs to produce outputs.

Outputs are the various useful goods and services that result from the production
process and are either consumed or employed for further production.

- Samuelson et al 2010
Factors of production
Society must decide 1) what outputs to produce, and in what quantity; 2) how, or
with what inputs or techniques, to produce the desired outputs; and 3) for whom
the outputs should be produced and distributed.

“Factors of production” - Economic term describing the inputs used to produce

outputs for profit.

• Land – natural resources, raw materials coming from the land

• Labour – human time spent in production
• Capital – durable goods of an economy – buildings, machines, tools used in
production, intellectual capital, social capital
• Entrepreneurship/Enterprise - this ties the other three factors together to come
up with innovative ideas to make companies profitable
- Samuelson et al 2010
 Production Function
• Inputs – factors of production

• Output? Given the technical knowledge, land, machinery, etc. only a certain amount of
goods can be obtained from a given amount of inputs.

• The relationship between the amount of input required and the amount of output that
can be obtained is called the production function.

• The production function specifies the maximum output that can be produced with a
given quantity of inputs. It is defined for a given state of engineering and technical
knowledge.

• The assumption here is that firms will always strive to produce efficiently, i.e. they
attempt to produce maximum level of output for a given dose of inputs.

- 136 Samuelson et al 2010

Total, Average and Marginal Product

• Three important concepts related to a firm’s production function

• Total
• Average
• Marginal
• Total Product is the “total amount of output produced, in physical units”
• E.g. kilos of wheat or number of sneakers
• Marginal Product of “an input is the extra output produced by 1 additional unit of
that input while other inputs are held constant. Marginal product calculations are
crucial to understand how wages and other factor prices are determined.
• Note: The term “marginal” means “extra”
• Average Product “equals total output divided by total units of input.”

- 136-7 Samuelson et al 2010

Total, Average and Marginal Product

- 137 Samuelson et al 2010

Total and Marginal Product
This two-paneled graph for the hourly production of Super Deluxe
TexMex Gargantuan Tacos (with sour cream and jalapeno peppers)
visually illustrates the connection between total product and marginal
product.
• For the first few quantities of the variable input (the number of
workers), total product in the top panel is positive AND the slope of
the total product curve increases, it becomes steeper. This
corresponds with a positive and increasing marginal product in the
bottom panel.

• For the next several quantities of the variable input, the slope of the
total product curve flattens out, although positive, the slope
decreases. This corresponds to a decreasing marginal product in the
bottom panel

• For the last few quantities of the variable input, the slope of the
total product curve in the top panel is negative. This corresponds
with a negative marginal product in the bottom panel.
- AmosWeb
Total and Marginal Product

• The slope of the total product curve is the mathematical connection between
the marginal product and total product.

• If the total product curve has a positive slope (that is, is upward sloping), then
marginal product is positive.
• If the total product curve has a negative slope (downward sloping), then
marginal product is negative.
• If the total product curve has a zero slope (horizontal), then marginal product
is zero.

Samuelson et al 2010
Opportunity Cost

“In a world of scarcity, choosing one thing means giving up something else. The
opportunity cost of a decision is the value of the good or service forgone.”

- Samuelson et al 2010
Production Possibility Frontier
A curve depicting all maximum output possibilities for two or more goods given a set of
inputs (resources, labor, etc.). The PPF assumes that all inputs are used efficiently.
- investopedia

Production possibilities, which analyzes the alternative combinations of two goods that an economy can produce
with given resources and technology, reflects the opportunity cost of production. In particular, the slope of a
production possibilities curve is the opportunity cost of the good measured on the horizontal axis. This opportunity
cost increases as production increases.
Consumption
Consumption, in economics, is the use of goods and services by households.

Consumption is distinct from consumption expenditure, which is the purchase of goods and services for use
by households.

Consumption differs from consumption expenditure primarily because durable goods, such as automobiles,
generate an expenditure mainly in the period when they are purchased, but they generate “consumption
services” (for example, an automobile provides transportation services) until they are replaced or scrapped

Neoclassical (mainstream) economists generally consider consumption to be the final purpose of economic
activity, and thus the level of consumption per person is viewed as a central measure of an economy’s
productive success.

Source: https://www.britannica.com/topic/consumption

Present day dominant school of economic thought built on the foundation laid by the 18th century (classical) theories of Adam Smith (1723-1790) and
David Ricardo (1772-1823), and refined by the 19th and 20th century theories of Alfred Marshall (1842-1924), Vilfredo Pareto (1848-1923), John Clark
(1847-1938), and Irving Fisher (1867-1947). It is 'classical' in the sense that it based on the belief that competition leads to an efficient allocation of
resources, and regulates economic activity that establishes equilibrium between demand and supply through the operation of market forces. It is 'neo'
in the sense that it departs sharply from the classical viewpoint in its analytic approach that places great emphasis on mathematical techniques.
Source: http://www.businessdictionary.com/definition/neo-classical-economics.html
Consumption
• “ … the use of goods and services by households.
• Neoclassical economists generally consider consumption to be the final purpose of economic activity, and
thus the level of consumption per person is viewed as a central measure of an economy’s productive
success.”
• The study of consumption behaviour plays a central role in both
• Macroeconomics
• economy’s productive capacity based on savings patterns {after consumption}
• Fluctuations and business patterns since consumption expenditure accounts for most of national
output*
• Microeconomics
• Studies consumption behaviour for many different reasons, using consumption data to measure
poverty, to examine households’ preparedness for retirement, or to test theories of competition in
retail industries - https://www.britannica.com/topic/consumption

* “Consumption is normally the largest GDP* component. Many persons judge the economic performance of their country
mainly in terms of consumption level and dynamics.” - http://www.economicswebinstitute.org/glossary/cons.htm

Neoclassical economics is an approach to economics that relates supply and demand to an individual's rationality and his
ability to maximize utility or profit. Neoclassical economics also uses mathematical equations to study various aspects of the
economy. - Investopedia
Characteristics of consumption
Consumption may be divided according to:
1) Durability of the purchased objects. In this vein, a broad classification separates:
• durable goods (as cars and television sets)
• from non-durable goods (as food)
• and from services (as restaurant expenditure). These three categories often show different paths of growth.

2) The needs it satisfies. A commonly used classification identifies ten chapters of expenditure: 1. Food, 2. Clothing and foot
wear, 3. Housing, 4. Heating and energy, 5. Health, 6. Transport, 7. House furniture and appliances, 8. Communication, 9.
Culture and schooling , 10. Entertainment’

3) Third, one should distinguish "consumption" as use of goods and services from "consumption expenditure" as buying
acts. For durable goods this difference is very relevant, since they are used for long time periods. In this vein, the rich have
a much wider cumulative bundle of durable goods purchased over time, so they enjoy a very significantly higher degree of
need satisfaction, whereas the poor can suffer deficiencies even in the most basic goods. Conversely, purchased non-
durable goods that are not consumed before the deadline are a typical waste (and squander).

4) Only newly produced goods enter into the definition of consumption, whereas the purchase of, say, an old house is not
considered consumption in macroeconomics, since it was already counted in the GDP of the year in which it was built.
Needless to say, for the consumer, both old and new goods provides some need satisfaction.
Sttp://www.economicswebinstitute.org/glossary/cons.htm
Consumption – Macro and Micro
The study of consumption behaviour plays a central role in both macroeconomics and microeconomics.

Macroeconomists are interested in aggregate Microeconomists have studied consumption

consumption for two distinct reasons. First, behaviour for many different reasons, using
aggregate consumption determines aggregate consumption data to measure poverty, to
saving, because saving is defined as the portion of examine households’ preparedness for
income that is not consumed. Because aggregate retirement, or to test theories of competition in
saving feeds through the financial system to create retail industries. A rich variety of household-
the national supply of capital, it follows that level data sources (such as the Consumer
aggregate consumption and saving behaviour has a Expenditure Survey conducted by the U.S.
powerful influence on an economy’s long-term government) allows economists to examine
productive capacity. Second, since consumption household spending behaviour in minute detail,
expenditure accounts for most of national output, and microeconomists have also utilized these
understanding the dynamics of aggregate data to examine interactions between
consumption expenditure is essential to consumption and other microeconomic
understanding macroeconomic fluctuations and behaviour such as job seeking or educational
the business cycle. attainment.
Source: https://www.britannica.com/topic/consumption
Standard of Living

Financial health of a population, as measured by per capita income and

consumption of goods and services by individuals or households.

• Financial Health: A way in which to measure the overall financial aspect of an individual
that includes the amount of assets they own and how much income they must pay out to
cover regular and other expenses.

• Per capita income: Total national income (GDP) divided by total population. It is not the
average income (because it includes children and non-working population) but serves as
an indicator of a country's living standards.

- Business Dictionary
Standard of Living
“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.”
- Investopedia

Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a
country's borders in a specific time period.
Quality of life - A highly subjective measure of happiness that is an important component of many financial
decisions. Factors that play a role in quality of life vary according to personal preferences, but they often include
financial security, job satisfaction, family life, health and safety.
Supply & Demand
Supply and Demand (55-79 Samuelson et al 2010)

• The modern mixed economy relies on a system of market and prices to solve
the three central problems of economy (55)
• Markets are always changing, but there are certain forces underlying the
apparently random market movements. A fundamental understanding of the
concepts of supply and demand is necessary to understand a market economy.
• The theory of supply and demand shows how consumer preferences determine
consumer demand for commodities, while business costs are the foundation
for the supply of commodities (55)
• E.g. the increase in the price of gasoline occurs either because of the
demand for gasoline increases or because the supply of gasoline has
decreased
Supply
Supply is a fundamental economic concept that
describes the total amount of a specific good or
service that is available to consumers.

The concept of supply in economics is complex with many

mathematical formulas, practical applications and
contributing factors. While supply can refer to anything in
demand that is sold in a competitive marketplace, supply is
most used to refer to goods, services or labor. One of the
most important factors that affects supply is the good’s price.
Generally, if a good’s price increases so will the supply. The
price of related goods and the price of inputs (energy, raw
materials, labor) also affect supply as they contribute to
Supply Curve
increasing the overall price of the good sold.

- Investopedia
What determines supply? (62-3 Samuelson et al 2010)

• Cost of Production: Producer supplies commodities for profit. When production

costs for a good are low relative to the market price, it is profitable for producers
to supply a great deal. When production costs are high relative to price, then firms
produce little/switch to producing other products/go out of business
• Production costs are determined by prices of inputs (resources, labor, energy,
machinery) and technological advances (changes that lower the quantity of
inputs needed to produce the same quantity of output). E.g. automobile
makers make more cars at the same cost
• Prices of related goods: Supply is also influenced by the prices, particularly goods
that are alternative outputs of the production process. If the price of one
production substitute rises, the supply of another substitute will decrease.
• E.g. of US farming: Government raised subsidy on automotive ethanol to reduce imports of
foreign oil. Ethanol is now made of corn. Increased demand for corn (shift in demand curve for
corn) increased corn price. So, farmers planted corn instead of soybeans. Net result - supply
of soybeans declined and soybean prices rose. All because of a subsidy to reduce oil imports.
Demand
An economic principle that describes a consumer's
desire and willingness to pay a price for a specific
good or service. Holding all other factors constant,
the price of a good or service increases as its
demand increases and vice versa.

Think of demand as your willingness to go out and buy a

certain product. For example, market demand is the total of
what everybody in the market wants.

Businesses often spend a considerable amount of money in

order to determine the amount of demand that the public has
for its products and services. Incorrect estimations will either
result in money left on the table if it's underestimated or Demand Curve
losses if it's overestimated.
- Investopedia
What determines demand? (58-8 Samuelson et al 2010)
• Market demand is the sum total of all individual demands.
• The market demand curve is found by adding together the quantities demanded by
all individuals at each price. It follows the law of downward-sloping demand.
• Forces behind the demand curve:
1. Average income: As people’s incomes rise, individuals tend to buy more of almost everything,
even if prices don’t change. E.g. automobile purchase
2. Size of market: The population affects the market demand curve. More the population, more
the people purchasing commodities
3. Prices and availability of related goods: These influence demand for a commodity. A
particularly important connection exists among substitute goods – ones that tend to perform
the same function, such as cornflakes and oatmeal, pens and pencils, small cars and big cars,
or oil or natural gas. Demand for good A is low if price of substitute produce B is low
4. Tastes / preferences: These represent historical/ cultural preferences. Genuine
psychological/physiological needs (food/shelter/entertainment) or artificially contrived
cravings (cigarettes/fancy high-priced commodities)
5. Special influences: Demand for umbrellas in Singapore is high. Demand for air conditioners
rises in hot weather. Demand for automobiles in New York is low (good public transit & less
parking space)
Demand (57 Samuelson et al 2010)

• Quantity and price are inversely related, i.e. Q goes up when P goes down
• The curve slopes downward, going from northwest to southeast. This is
called the law of downward-sloping demand.
• Law of downward-sloping demand: When the price of a commodity is raised
(and other things held constant), buyers tend to buy less of the commodity.
Similarly, when the price is lowered, other things being constant, quantity
demanded increases.
• Quantity demanded falls for two reasons:
1. Substitution effect – occurs when one good becomes relatively more expensive when its
price increases. So consumers substitute it with a cheaper replacement
2. Income effect – occurs because, when a price goes up and the consumer buys the (now)
higher-priced item, he/she finds themselves poorer than before. So, the consumer is likely
to curb consumption
• The market demand curve is found by adding together the quantities
demanded by all individuals at each price.
Supply/Demand & Market Price

The market price is the current price at which

an asset or service can be bought or sold.
Economic theory contends that the market
price converges at a point where the forces of
supply and demand meet. Shocks to either the
supply side and/or demand side can cause the
market price for a good or service to be re-
evaluated.
- Investopedia
Equilibrium of Supply and Demand (65 Samuelson et al 2010)

• Supply and demand interact to produce an equilibrium price and quantity, or a

market equilibrium (65)
• The market equilibrium comes at that price and quantity where the forces of
supply and demand are in balance
• At the equilibrium price, the amount that buyers want to buy is just equal to the
amount that sellers want to sell
• A market equilibrium comes at the price at which quantity demanded equals
quantity supplied. The equilibrium price is also called the market-clearing price.
This denotes that all supply and demand orders are filled, the books are cleared of
orders, and demanders and suppliers are satisfied
Economic Equilibrium
In economics, economic equilibrium is a state where economic forces such as supply
and demand are balanced and in the absence of external influences the (equilibrium)
values of economic variables will not change.

Economic theory suggests that, in a free market there will be a single price which
brings demand and supply into balance, called equilibrium price. Both parties require
the scarce resource that the other has and hence there is a considerable incentive to
engage in an exchange. http://www.economicsonline.co.uk/Competitive_markets/Market_equilibrium.html

Economic equilibrium can be static or dynamic and may exist in a single market or
multiple markets. It can be disrupted by exogenous factors, such as a change in
consumer preferences, which can lead to a drop in demand and consequently a
condition of oversupply in the market. In this case, a temporary state of disequilibrium
will prevail until a new equilibrium price or level is established, at which point the
market will revert back to economic equilibrium. (Investopedia)
Equilibrium of Supply and Demand (67 Samuelson et al 2010)
• The equilibrium price comes at the intersection of the
supply and demand curves, at point C.
• The equilibrium price and quantity come where the
amount willingly supplied equals the amount willingly
demanded.
• In a competitive market, this equilibrium is found at the
intersection of the supply and demand curves.
• There are no shortages or surpluses at the equilibrium
price

• In this example:
• Surplus – Excess of quantity supplied over quantity demanded. The
arrows move downward when the market is in surplus
• Shortage – Excess of quantity demanded over quantity supplied.
Here, the arrows move upward as competition among buyers for
limited goods causes the prices to rise.
Shifts in Demand (60-1 Samuelson et al 2010)

• As economic life evolves, demand shifts incessantly

• When there are changes in factors other than a good’s own price which
affect the quantity purchased, we call these changes shifts in demand.
Demand increases (or decreases) when the quantity demanded at each
price increases. (60)
Shifts in Demand (60-1 Samuelson et al 2010)

• Difference between movements along a curve and

shift of a curve
• Curve denotes “change in quantity demanded
(which means moving along, or moving to a
different point, on the same demand curve
after a price shift)” (e.g. if pizza prizes fall due
to change in technology, all other factors
remaining the same, then consumers tend to
buy more pizzas. This is due to pizza price
decrease and not to change in demand)
• Shift in demand curve denotes, “change in
demand” (e.g. higher incomes increase
demand for pizza, out and the right of the
previous demand curve)
Shifts in Supply (63-4 Samuelson et al 2010)
• When changes in factors other than a good’s own price affect the quantity
supplied, we call these changes shifts in supply. Supply increases (or decreases)
when the amount supplied increases (or decreases) at each market price (63)
• Factors influencing supply curve:
• Technology (computerized manufacturing lowers production costs and
increases supply)
• Input prices (reduction in the wage paid to autoworkers lowers production
costs and increases supply)
• Prices of related goods (if truck prices fall, the supply of cars increases)
• Government policy (removing quotas and tariffs on imported automobiles
increases total automobile supply)
• Special influences (internet shopping and auctions allow consumers to
compare the prices of different dealers more easily and drives high-cost sellers
out of business)
Effect of a shift in Supply and Demand (67 Samuelson et al 2010)
• Suppose a spell of bad weather raises the price of wheat
(ingredient for bread). This shifts the supply curve of the bread
to the left (SS to ŚŚ). In contrast, the demand curve has not
shifted because people’s sandwich demand is unaffected by
farming weather.
• The bad harvest causes profit-maximizing bakers to produce less
bread at the old price, so quantity demanded exceeds quantity
supplied.
• Price of bread rises, encouraging production and thereby raising
quantity supplied, while simultaneously discouraging
consumption and lowering quantity demanded.
• The price continues to rise until, at the new equilibrium price,
the amounts demanded and supplied are once again equal.
• The new equilibrium is at É, the intersection of the new supply
curve and the original demand curve.
• Thus a bad harvest (or any leftward shift of the supply curve)
raises prices and, by the law of downward-sloping demand,
lowers quantity demanded
Effect of a shift in Supply and Demand (67 Samuelson et al 2010)

• The supply-and-demand apparatus examines

how changes in demand affect the market
equilibrium
• Suppose there is a sharp increase in family
incomes, so everyone wants to eat more bread
• This is represented as a “demand shift” in
which, at every price, consumers demand a
higher amount of bread
• The demand curve thus shifts rightward from
DD to D´D´
• The new equilibrium is at É, the intersection of
the original supply curve and the new demand
curve.
Effect of a shift in Supply and Demand (67 Samuelson et al 2010)

Shifts in Supply or Demand Change Equilibrium Price and Quantity

(a) If supply shifts leftward, a shortage will develop at the original price. Price will be bid up until
quantities willingly bought and sold are equal at new equilibrium É
(b) A shift in the demand curve leads to excess demand. Price will be bid up as equilibrium price and
quantity move upwards to É
Elasticity
“The degree to which a demand or supply curve reacts to a change in price is the
curve's elasticity.”

• Elasticity varies among products because some products may be more essential to
the consumer.

• Products that are necessities are more insensitive to price changes because
consumers would continue buying these products despite price increases.

• Conversely, a price increase of a good or service that is considered less of a

necessity will deter more consumers because the opportunity cost of buying the
product will become too high.”

- Investopedia
Elasticity
“A good or service is considered to be highly elastic if a slight change in price leads to
a sharp change in the quantity demanded or supplied.

• Usually these kinds of products are readily available in the market and a person
may not necessarily need them in his or her daily life.

“An inelastic good or service is one in which changes in price witness only modest
changes in the quantity demanded or supplied, if any at all.”

• These goods tend to be things that are more of a necessity to the consumer in his
or her daily life.

- Investopedia
Elasticity
To determine the elasticity of the supply or demand curves, we can use this
simple equation:

Elasticity = (% change in quantity / % change in price)

If elasticity is greater than or equal to one, the curve is considered to be elastic.

If elasticity is less than one, the curve is said to be inelastic.

- Investopedia
Laws of Returns
Laws of Returns
Return
The gain or loss of a security in a particular period. The return consists of the
income and the capital gains relative on an investment. It is usually quoted as a
percentage.

Laws
• Law of Diminishing Returns
• Law of Increasing Returns
• Law of Constant Returns
Laws of Diminishing Returns

The important law of diminishing returns emerges from the production function

Under the law of diminishing returns, a firm will get less and less output when it
adds additional units of an input while holding other inputs fixed. In other words,
the marginal product of each unit of input will decline as the amount of that input
increases, holding all other inputs constant.

Also called
- law of variable proportions
- principle of diminishing marginal productivity
- diminishing marginal returns
Laws of Diminishing Returns
Another definition:
A concept in economics that if one factor of production (number of workers, for
example) is increased while other factors (machines and workspace, for example)
are held constant, the output per unit of the variable factor will eventually
diminish.

Although the marginal productivity of the workforce decreases as output increases,

diminishing returns do not mean negative returns until (in this example) the
number of workers exceeds the available machines or workspace.

In everyday experience, this law is expressed as "the gain is not worth the pain.“

– Business Dictionary
Law of Diminishing Returns
• In the classic example of the law, a farmer who owns a given acreage of land
will find that a certain number of labourers will yield the maximum output per
worker
• If he should hire more workers, the combination of land and labour would be
less efficient because the proportional increase in the overall output would be
less than the expansion of the labour force
• The output per worker would therefore fall
• This rule holds in any process of production unless the technique of production
also changes

- Britannica
Laws of Diminishing Returns
These graphs highlight the key role played by the law of
diminishing marginal returns in the slope of both the
marginal product curve and the total product curve. The
"hump shape" of the marginal product curve is a direct
reflection of first increasing marginal returns, as marginal
product rises to a peak, then decreasing marginal returns
and the onset of the law of diminishing marginal returns as
marginal product falls.
However, because the marginal product curve is essentially a
plot of the slope of the total product curve, the shape of the
total product curve also reflects the law of diminishing
marginal returns. The increasingly steep slope of the total
product curve for small quantities of the variable input is due
to increasing marginal returns. Then with the onset of the
law of diminishing marginal returns causes the total product
curve to flatten out and subsequently turn down
Laws of Diminishing Returns

Google Images
Law of Diminishing Returns
• The law of diminishing returns is a widely observed empirical regularity
• Found in numerous studies but exceptions also exist
• Moreover diminishing returns might not hold for all levels of production
• The very first inputs of labour might actually show increasing marginal
products, since a minimum amount of labour may be needed to start the
process of working
• But these cases are the exception, and in most cases diminishing returns
prevail

139 Samuelson et al 2010

Law of Increasing Returns
As the proportion of one factor in a combination of factors is increased, up to a
point, the marginal product of the factor will increase.”

The law of increasing returns is the opposite of the law of decreasing returns.
Where the law of diminishing returns operates, every additional investment of
capital and labour yields less than proportionate returns. Increasing returns mean
lower costs per unit just as diminishing returns mean higher costs.

Thus, the law of increasing return signifies that cost per unit of the marginal or
additional output falls with the expansion of an industry. As more and more units
of the commodity are produced, the cost per unit goes on steadily falling.

- Economics Discussion
Application of Law of Increasing Returns

- Economics Discussion
Law of Constant Returns
The law of constant returns is said to operate when the return remains the same
as the business is expanded or contracted.

Every additional investment of labour and capital yields the same return as
before.
Or in other words, whatever the scale of production, the cost of the product per
unit remains the same.

In certain cases, and when the business moves towards the optimum, the returns
increase, and when it goes beyond the optimum, the returns decrease. But if,
after having reached the optimum point, the industry is stabilized at that level of
output, the returns, continue to be the same; and they are said to be constant.

- Economics Discussion
Application of Law of Constant Returns

- Economics Discussion
Returns to Scale

• Diminishing returns and marginal products refer to the response of output to an

increase of a single input when all other inputs are held constant.
(in the previous example, increasing labour while holding land constant would increase food output by
ever-smaller increments)
• But, what would happen if all factors of production (land, labour, water, etc.) were
increased by the same proportion?
• For instance, what would happen to the production of tractors if the quantities of
labour, computers, robots, steel and factory space were all doubled?
• These questions refer to the “returns of scale” or the effects of scale increases of
inputs on the quantity produced.
Returns to Scale

• Three important cases of returns of scale:

• Constant returns to scale
• Increasing returns to scale
• Decreasing returns to scale

140 Samuelson et al 2010

Constant Returns to Scale
• A case where a change in all inputs leads to a proportional change in output.
• Eg. If labour, land, capital and other inputs are doubled, then under constant
returns to scale output would also double

• Handloom industry in India , handicrafts

Samuelson et al 2010
Increasing Returns to Scale (Economies of Scale)
• A case when an increase in all inputs leads to a more-than-proportional
increase in the level of output.

• E.g. Engineering studies have shown that many manufacturing processes enjoy
modestly increasing returns to scale for plants up to the largest size used today

Samuelson et al 2010
Decreasing Returns to Scale
• A case when a balanced increase of all inputs leads to a less than-proportional
increase in total output.

• In many cases, scaling up may eventually reach a point beyond which

inefficiencies set in.

• E.g. in electricity generation, firms found that when plants grow too large, risks
of plant failures grew large too
• Productive activities involving natural resources (e.g. growing wine grapes or
providing clean drinking water to a city), show decreasing returns to scale.
Samuelson et al 2010
Production shows increasing, decreasing, or constant returns to scale when a
balanced increase in all inputs leads to a more-than-proportional, less-than-
proportional, or just-proportional increase in output.

Samuelson et al 2010

The anticipated pattern for most production activities is that increasing returns to
scale emerge for relatively small levels of production, which is then followed by
constant returns to scale and decreasing returns to scale.
http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=constant+returns+to+scale
Land Value and Utilization
 Urban Land Values

https://sites.google.com/a/guilsboroughgeography.com/www/landvaluescone.jpg
Land use and utilization
Land Use
Land use is the function of land - what it is used for. Land use varies from area to
area. In rural areas (countryside) land use can include forestry and farming. In urban
areas (towns and cities) land use could be housing or industry.
- Internet Geography

Land Utilization
A land utilization type is a kind of land use described or defined in a degree of detail
greater than that of a major kind of land use.
• A land utilization type consists of a set of technical specifications in a given physical, economic and
social setting
• In detailed or quantitative land evaluation studies, the kinds of land use considered will usually
consist of land utilization types
• Thus land utilization types are not a categorical level in a classification of land use, but refer to any
defined use below the level of the major kind of land use
- Food and Agriculture Organization
Land use
and utilization
Land value
The value of a piece of property, including both the value of the land itself as well
as any improvements that have been made to it.

Land values increase:

• when demand for land exceeds the supply of available land
• or if a particular piece of land has intrinsic value greater than neighboring
areas (e.g. oil can be found on the land).
- Investopedia

When does land value decrease?

Land value
• Land value - the relationship between a desired location and a potential user
• The economic factors that determine land value are
• Utility
• Scarcity
• Desirability
• Land that lacks utility and scarcity also lacks value, since utility arouses desire for use
and has the power to give satisfaction
• 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.

- Understanding Economics
Factors that Contribute to Land Value
• Physical attributes: 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.
• Legal or governmental forces: the type and amount of taxation, zoning and
building laws, planning and restrictions.
• Social factors: population growth or decline, changes in family sizes, typical ages,
attitudes toward law and order, prestige and education levels.
• Economic forces: 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.
- Understanding Economics
Land value – Governmental limitations on Land Ownership and
Use
There are legal, political and social constraints and also governmental regulations
that put 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.
- Understanding Economics
Bid Rent Curve
• “The bid rent theory is a geographical economic theory that
refers to how the price and demand for real estate change
as the distance from the central business district (CBD)
increases.
• According to the bid rent theory, different land users will
compete with one another for land close to the city center.
This is based upon the idea that retail establishments wish
to maximize their profitability, so they are much more
willing to pay more for land close to the CBD and less for
land further away from this area.
• This theory is based upon the reasoning that the more
accessible an area (i.e., the greater the concentration of
customers), the more profitable
• Land users all compete for the most accessible land within
the CBD. The amount they are willing to pay is called "bid
rent.”
- Wikipedia
Bid Rent Curve - Contradictions
• “According to this theory, it can be assumed that the
poorest houses and buildings would be on the very
outskirts of the city, as this is the only location that they
can afford to occupy.
• However, many people prefer to trade off proximity to the
CBD and move to the edges of a settlement, where it is
possible to buy more land for the same amount of money
(as the bid rent theory states).
• Also, lower-income housing trades off greater living space
for increased accessibility to employment.
• For this reason, low-income housing in many North
American cities, for example, is often found in the inner
city, and high-income housing is at the edges of the
settlement.”
- Wikipedia
Central business district of a city
• The CBD or Central Business District is “the commercial, office, retail, and cultural center
of the city and usually is the center point for transportation networks.”
• Traditionally the commercial center of settlements. On market days, farmers, merchants
and consumers would gather in the center of the city to exchange, buy, and sell goods.
As cities grew and developed, CBDs became fixed locations where retail and commerce
took place.
• Typically at or near the oldest part of the city and is often near a major transportation
route around which the city grew - such as a river, railroad, or highway.
• Over time, the CBD developed into a center of finance and control or government as well
as office space.
• In the early 1900s, European and American cities had CBDs that featured primarily retail
and commercial cores.
• In the mid-20th century, the CBD expanded to include office space and commercial
businesses while retail took a back seat.

- about education
Internal spatial structure of the city
• Concentric zone theory (Burgess 1925)
• Sector theory (Hoyt 1939)
• Multiple nuclei concept (Harris and Ullman 1945)
Internal structure of the city
Classic Models of urban growth in the US, 1920s onwards
Concentric Zone Model - Ernest Burgess 1925

• Developed by Ernest Burgess, an

urban sociologist in 1925.
• Based on Burgess’s observations of his
city Chicago.
• The model divides cities in a set of
concentric circles expanding from the
downtown to the suburbs
• Burgess proposed that urban growth
is a process of expansion and
reconversion of land uses, with a
tendency of each inner zone to
expand in the outer zone
• The Concentric Zone model was the
first to explain the distribution of
different social groups within urban
areas.
The Different Rings of the Concentric Zone Model
Zone I: Central Business District
Zone VI: Commuter Zone
Most of the tertiary employment
Mainly high class and expensive housing
located here. Urban transport
in a rural, suburbanized, setting. High
infrastructure converges here.
commuting costs. Before the
Most accessible zone
automobile became common (1930s),
Zone II: Factory Zone most of these settlements located next
Immediately adjacent to the CBD. to rail stations
Many industrial activities locate
here to take advantage of nearby Zone V: Residential Zone
labor and markets. Most transport Higher quality housing
terminals, namely port sites and linked with longer
railyards located here commuting costs
Zone III: Transition Zone
Gradually gets reconverted to other Zone IV: Working class zone
uses by expanding manufacturing / Residential zone dominated by the working class
industrial activities. Low income and those who were able to move away from the
population (notably first generation previous zone (often second generation
immigrants) reside here in poor immigrants). Has the advantage of being located
housing conditions. near major zones of employment (I and II). Thus it
is a low cost location for the working class.
 Concentric Zone Model - Ernest Burgess 1925
• Burgess described the changing spatial patterns of residential
areas as a process of "invasion" and "succession".
• This model shows a positive correlation between socio-
economic status of households and distance from the CBD —
more affluent households were seen to live further away from
the central city.
• Outward expansion of the CBD would invade nearby residential
neighborhoods causing them to expand outward, away from the
CBD
• Burgess suggested that inner-city housing was largely occupied
by immigrants and households with low socio-economic status.
As the city grew and the CBD expanded outward, lower status
residents moved to adjacent neighborhoods, and more affluent
residents moved further from the CBD

http://urbanplacesandspaces.blogspot.in/2011/12
/low-income-high-income-market-and-right.html
Concentric Zone Model - Ernest Burgess 1925
• Burgess's work was based on the bid rent curve
• The bid rent curve is a geographical economic theory that refers to
how the price and demand for real estate change as the distance
from the central business district (CBD) increases
• This theory is based upon the reasoning that the more accessible an
area (i.e., the greater the concentration of customers), the more
profitable
• Land users all compete for the most accessible land within the CBD.
The amount they are willing to pay is called "bid rent“
• According to the bid rent theory, different land users will compete
with one another for land close to the city center. This is based upon
the idea that retail establishments wish to maximize their
profitability, so they are much more willing to pay more for land
close to the CBD and less for land further away from this area
• Manufacturing will pay slightly less for the land as they are only
interested in the accessibility for workers, 'goods in' and 'goods out'
Residential land use will take the surrounding land. oved further
from the CBD.
Concentric Zone Model - Ernest Burgess 1925
For: Against:
It does not take any physical features into account.
If taken as a very broad pattern, then a large number of Burgess' own case study - Chicago - does not follow
towns and cities follow the pattern identified by the pattern because it is on the coast. The growth of
Burgess. any city will be influenced by the physical geography of
the area.
Transport is much more readily available allowing
more people to commute. This has meant that
It is a simple and easily understandable model commuter villages have developed some distance from
the edge of the urban area. Burgess could not have
foreseen this.
Urban regeneration and gentrification has meant that
Burgess could not have foreseen the changes in some of the most expensive property can now be
transport routes or society yet his model is still relevant found in traditional 'low class' areas. Whilst council
when identifying the reasons behind a city’s estates have built up on the edges of many large cities
morphology - these are now some of the most depressed areas in
British cities.
Helps to understand the process involved in the growth The decentralisation of shops, manufacturing industry
of a city. and entertainment does not follow his model.
Sector Theory – Homer Hoyt, 1939
• Also known as Hoyt model
• A study of residential areas done in 1939 by Homer
Hoyt, a land economist, in the North American context
concluded that the land use pattern was not a random
distribution, nor sharply defined rectangular areas or
concentric circles, but rather sectors.
• Communication axes, such as rail lines and major roads,
are mainly responsible for the creation of sectors, thus
transport has directional effect on land uses.
• Thus the effect of direction was added to the effect of
distance
• As the city grows, activities within it grow outward in a
wedge shape from the CBD
• The sector representation also includes concentric
transitional processes observed by Burgess, which is
occurring along axis.
• Different areas attract different activities by chance or
by environmental factors.
 Location of activities in Sector Theory
• CBD - central business district, the area of a city where retail and office activities are clustered. It is
also called the central activities district. In North America, it is called “downtown.” In Chicago, it would
be the area closest to the lake, most notably Michigan Avenue.
• Industry
• Industry follows rivers, canals, railroads, or roads
• Lower class workers work here. Low pay, poor work conditions
• Produces goods or other domestic products for city
• Low Class Residential
• Low income housing
• Near railroads that feed factories
• Live near industry to reduce transportation costs
• Pollution or poor environmental conditions due to industry
(traffic, noise and pollution make it cheap)
Sector Theory – Homer Hoyt, 1939
• Middle Class Residential
• More desirable area because it is further from industry and pollution
• Access to transportation lines for working people who work in the CBD, making transport easier
• Largest residential area

• High Class Residential

• Housing on outermost edge
• Furthest away from industry
• Quiet, clean, less traffic
• Corridor or spine extending from CBD to edge has
best housing
“Real world cities are not purely monocentric, they have other major activity areas
(MACs) besides the CBD.
Large cities are sprinkled with neighborhood business districts (NBDs) that serve
needs of local communities”

CBD where land

value is highest Multiple clusters of
Suburban retail
economic centers
and office cluster

NBD NBD CBD NBD

Source: “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner
Multiple nuclei model – Harris and Ullman, 1945
• Formulated by geographers Chauncy Harris and Edward
Ullman (1945)
• A model of urban land use in which a city grows from several
independent nodes rather than from one central business
district. Each point acts as a growth center from a particular
kind of land use, such as industry, retail, or high-quality
housing. As these expand, they merge to form a single urban
area. The CBD is not the only generator of change.
• The multiple nuclei model recognizes that many towns and
nearly all large cities do not grow around one CBD, but are
formed by the progressive integration of a number of
separate nuclei in the urban pattern
• The distance decay theory is still applicable to this model.
Land value and population density decline with distance from
the central places.
These nodes become specialized and differentiated in the
growth process and are not located in relation to any distance
attribute, but are bound by a number of attributes
Multiple nuclei model – Harris and Ullman, 1945
The attributes being:
Differential accessibility. Some activities require specialized
facilities such as port and rail terminals. For instance, the
retailing sector demands maximum accessibility, which is often
different from centrality offered in the CBD
Land use compatibility. Similar activities group together since
proximity implies improved interactions through the process of
economies of agglomeration. Service activities such as banks,
insurance companies, shops and institutions are strongly
interacting with each other. This can be defined as centripetal
forces between activities.
Land use incompatibility. Some activities are repelling each-
other such as high quality residential and heavy industrial. This
may be defined as centrifugal forces.
Location suitability. Some activities cannot afford the rent of
the optimal site for their location. They are thus locating at
cheaper places, which are not optimal, but suitable for these
activities
Difference between the three models

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g/structura-urbana/ g/structura-urbana/ g/structura-urbana/

Polycentric
Monocentric Monocentric Multiple nuclei more complex in
Uses the concept of Emphasizes the term of land use zones, e.g.
expansion and succession significance of industrial suburbs
direction in multiple nuclei allows the
determining land use suburbanization, transport
patterns development, outward growth of
city
multiple nuclei model gives the idea
of land use pattern city only
Life cycle costing with reference to building
“Life Cycle Costing is a method of calculating the costs of a building over its entire
lifetime. Sometimes called a 'cradle to grave' analysis, life cycle costing calculates
costs like construction, utility bills, maintenance and end-of-life demolition.

Often in construction, decisions are made that favor short-term gain over long-term sustainability.
For example, while it may be cheaper for a housing developer to build a house with single rather
than double-glazed windows, this means the house will be less energy-efficient and the
homeowner will be saddled with higher energy bills. Life Cycle Costing allows us to compare
different buildings and make design decisions that favor long-term environmental benefits and
long-term cost-savings.”

- Make it Right
Life cycle costing with reference to building
• The normal economic life span of a building is around 60 years
• Life cycle cost refers to the entire cost of the building right from the
construction stage till its economic life span is over. It is the sum total of
construction costs, operating costs and maintenance costs of the building
• Operating cost refers to the cost of running the services essential for the
smooth functioning of the building. Includes cost of water, electricity,
telephones, running costs of lifts, air-conditioning and other equipment
• Maintenance cost includes minor repairs, repainting, etc.
• The base year for calculation of the life cycle cost is the year of construction of
the building
• It has to be noted that due to inflation, the actual costs of operation and
maintenance may be higher than what is estimated at the time of construction
Land Development, Life Cycle Costing,
Time Value of Money, Building Finance
Inflation
Inflation is the rate of increase of the general
level of prices for goods and services. In other
words, it is the term used when the prices for
goods and services increase over time.
For example, if the inflation rate is 3%, then a $1 can of
soda will cost $1.03 a year from now. When inflation
occurs, money buys a smaller percentage of a good due
to the increase in price.
http://study.com/academy/lesson/inflation-definition-types-causes-effects.html

https://app.hedgeye.com/insights/35829-cartoon-of-the-day-the-old-inflation-ball-and-chain http://www.greekshares.com/inflation.php
Land Development
• Development of land refers to the conversion of raw land used for agricultural purposes or unused
land into developed land by providing roads, water supply, sewerage, electricity and telephone
services
• Steps of land development
• Development of urban land can be undertaken either by government agencies or private
developers, the latter being profit-driven in their ventures
• The developer has to submit an application (with fees) to get concerned government agency’s
sanction for the conversion of raw land, (such as agricultural land) to non-agricultural purpose
• After the sanction for conversion is granted, the developer has to prepare a layout plan
indicating the location of roads, residential plots and services and submit it to the government
development authority for approval
• After the development authority approves the layout plan, it can be implemented
• Once the basic layout has been demarcated on the site, the land is said to be developed since it
is ready for construction of buildings
• The developed land can accommodate any kind of land use – residential, commercial,
institutional, etc.
• Irrespective of the land use on the layout, the layout has to satisfy the local authority’s rules
and regulations.
Life cycle costing with reference to building
“Life Cycle Costing is a method of calculating the costs of a building over its entire
lifetime. Sometimes called a 'cradle to grave' analysis, life cycle costing calculates
costs like construction, utility bills, maintenance and end-of-life demolition.

Often in construction, decisions are made that favor short-term gain over long-term sustainability.
For example, while it may be cheaper for a housing developer to build a house with single rather
than double-glazed windows, this means the house will be less energy-efficient and the
homeowner will be saddled with higher energy bills. Life Cycle Costing allows us to compare
different buildings and make design decisions that favor long-term environmental benefits and
long-term cost-savings.”

- Make it Right
Life cycle costing with reference to building
• The normal economic life span of a building is around 60 years
• Life cycle cost refers to the entire cost of the building right from the
construction stage till its economic life span is over. It is the sum total of
construction costs, operating costs and maintenance costs of the building
• Operating cost refers to the cost of running the services essential for the
smooth functioning of the building. Includes cost of water, electricity,
telephones, running costs of lifts, air-conditioning and other equipment
• Maintenance cost includes minor repairs, repainting, etc.
• The base year for calculation of the life cycle cost is the year of construction of
the building
• It has to be noted that due to inflation, the actual costs of operation and
maintenance may be higher than what is estimated at the time of construction
Life cycle costing with reference to building
Life cycle costing with reference to building
Time value of money
The idea that money available at the present time is worth more than the same
amount in the future due to its potential earning capacity. This core principle of
finance holds that, provided money can earn interest, any amount of money is worth
more the sooner it is received.

Also referred to as "present discounted value".

Option A - Receive $10,000 now / Option B - Receive $10,000 in three years.

- Investopedia
Cost and cost indices preliminary to building
Cost
“An amount that has to be paid or given up in order to get something.”

“In business, cost is usually a monetary valuation of (1) effort, (2) material, (3)
resources, (4) time and utilities consumed, (5) risks incurred, and (6) opportunity
forgone in production and delivery of a good or service. All expenses are costs, but
not all costs (such as those incurred in acquisition of an income-generating asset) are
expenses.”

Asset: Something valuable that an entity owns, benefits from, or has use of, in
generating income.
- Business Dictionary
Construction Cost Index (CCI), India
“Construction Cost Index is an indicator of the average cost movement over time of a
fixed basket of representative goods and services related to [the] Construction
Industry.”

“It is the monthly measure of Construction Cost movement for the Indian Construction Industry released
by CIDC (Construction Industry Development Council).”

What is the purpose of the CCI?

• Primary objective of CCI is to bring out an estimate of inflation / deflation values for the Construction
Industry
• It can help in evaluating the cost variation for project delays, escalation claims, liquidated damages
etc.
• Ultimate use of the index compilation will depend upon the quality of data management and data
dissemination - Construction Industry Development Council, India

In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs
when the inflation rate falls below 0% (a negative inflation rate). Inflation reduces the value of currency
over time, but deflation increases it.
CCI Formation Process
• Identification of the base year;
• Identification of the item basket;
• Allocation of weights at item, groups/ subgroups level;
• Statistical Analysis for the number evaluation;
• Publishing the Indices;
• Data management and warehousing.

Criteria for Base Year

• A normal year i.e. a year in which there are no abnormalities in the level of production, trade
and in the price level and price variations;
• A year for which reliable production, price and other required data are available; and
• A year as recent possible and comparable with other data series at national and state level

- Construction Industry Development Council, India

Item Basket Composition
• Items in the index basket are the best representatives of the sector;
• All the important items transacted in the economy during the base year are
included;
• The importance of an item depends on its traded value during the base year;
• At CCI level, bulk transactions of goods and services are captured;
• Current prices are collected as per the item basket from the designated sources.
• Monthly CCI are released to the press and CIDC website simultaneously
• It is also published in the CIDC Quarterly Journal ‘Nirman Udyog’

- Construction Industry Development Council, India

Cost index, CPWD India 2015
Sample Cost index for South zone III
Sources of finance for building
• Construction finance is one of the major concerns of any firm
• Factors that weigh in decisions regarding construction finance
• Laws of the land
• State of the economy
• The need to minimize cost
• Different types of construction enterprises ranging from sole proprietorships
to large multi-nationals

- Financing within the Construction Industry

Sources of finance for building
• Finance is needed throughout a company's life. The type and amount of finance
required for a business depends on many factors: type of business, success of
firm and state of the economy.

• There are two main types of money that a company needs.

• Capital expenditure: Used for buying fixed assets where large sums of
money are involved but they are not purchased often e.g. new premises.
• Working capital: Day to day money required for running the business.

• There are two main sources of finance, these are internal sources and external
sources.

- Project Alevel
Internal Sources of finance for building
• Retained profit
• Profit made is reinvested into the business
• Controlling working capital
• Reducing costs, delaying outflows and speeding up inflows
• Sale of assets
• Assets the company owns can be sold and then leased back which
frees up a large amount of capital in the short term.

- Project Alevel
External Sources of finance for building - I
• Increasing trade credit - delaying payments on purchases for as long as possible.
• A trade credit is an agreement where a customer can purchase goods on account (without
paying cash), paying the supplier at a later date
• Overdraft - an agreement with a bank to be allowed to overdraw a certain amount.
• An overdraft allows the individual to continue withdrawing money even if the account has no
funds in it.
• Grants - an agreed amount of money given for a special reason by government or other
organisation.
• Venture capital - Money provided by investors to startup firms and small businesses with perceived
long-term growth potential.
• This is a very important source of funding for startups that do not have access to capital
markets. It typically entails high risk for the investor, but it has the potential for above-average
returns.
• Debentures - business equivalent of a mortgage. Loan for a set length of time at a set
interest rate.
• A type of debt instrument that is not secured by physical assets or collateral. Debentures are
backed only by the general creditworthiness and reputation of the issuer. Both corporations andAlevel
- Project
governments frequently issue this type of bond in order to secure capital.
External Sources of finance for building - II
• Share issues - selling of new shares to raise capital.
• The capital of a company is divided into shares. Each share forms a unit of ownership of a
company and is offered for sale so as to raise capital for the company.
• Owner savings - the owners investing money into the business.
• Bank loans - medium or long term loans but interest is charged.
• Leasing - instead of buying
• A legal document outlining the terms under which one party agrees to rent property from
another party. A lease guarantees the lessee (the renter) use of an asset and guarantees the
lessor (the property owner) regular payments from the lessee for a specified number of
months or years.

- Project Alevel
Housing market dynamics in India
Massive supply-demand gap exists for affordable housing worth Rs 25 lakh in MMR: Report
https://www.moneycontrol.com/news/business/real-estate/massive-supply-demand-gap-exists-for-affordable-
housing-worth-rs-25-lakh-in-mmr-report-9293081.html

Amid lower demand, new supply of affordable homes dipping in India: Anarock (Business Standard,
2024)
https://www.business-standard.com/industry/news/amid-lower-demand-new-supply-of-affordable-homes-
dipping-in-india-anarock-123100900568_1.html

Decoding India's real estate boom: What's driving the demand? (India Today, Jul 17, 2023)
https://www.indiatoday.in/business/story/india-real-estate-market-growth-urbanisation-infrastructure-
2407562-2023-07-17

Housing for India’s Low Income Households: A Demand Perspective (ICRIER Working Paper, 2020)
https://icrier.org/pdf/Working_Paper_402.pdf