FACULTY OF ENGINEERING, TECHNOLOGY APPLIED

DESIGN AND FINE ART

DEPARTMENT OF CIVIL ENGINEERING

CONSTRUCTION ECONOMICS – BCE 4206

LECTURE 1: INTRODUCTION
1.0 COURSE OUTLINE

Course Name: Construction Economics

Course Code: BCE 4206
Course Level: Year Four Semester II
Credit Unit: 4 CU

Course description
Construction economics course introduces students to economic principles and methods, and
accounting principles which will enable them to understand the socio-economic environment.

Objectives
• Understand economic and accounting principles
• Carry out a cost analysis and estimation of project costs

Learning outcomes
On completing the course, the student should be able to:
• Explain the strengths and weaknesses of the various investment decision criteria.
• Use capital budgeting techniques to analyse the profitability of any investment.
• Use MS Excel to build cash flow models that can be used for investment decision making
and valuation.

Course content

1. Introduction of economics [20CH]

• History of economic thought and definition of economics

• Macro and micro economics
• Economics laws and applications
• Assumptions and methods of economics
• Cost benefit analysis, prices, wages, rent, interest and profit
• Economic planning and development

2. The social framework [15CH]

• Population, allocation of economic resources, demand and supply
• concepts
• The structure, organization and ownership the means of production
• National income, GDP, GNP

3. Accounting [15CH]
• Its components and determinants
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 • Methods of estimating costs
• Single price methods – annual rate of return
• Unit methods
• Superficial area methods
• Elemental methods
• Approximate methods

4. Introduction to cost planning and cost control [10CH]

• Techniques

Mode of teaching/delivery
The course shall be conducted through lectures and tutorials.

Mode of assessment
Assessment will be done through continuous interim assessments (assignments and tests) and a
final examination. Interim assessment will carry a total of 40% and final examination will carry 60%
of the final grade mark.

Reading/reference materials
1. Brealey, Myers and Allen (2008). Principles of Corporate Finance (9th ed). Mcgraw-Hill, New
York.
2. S. Lumby (1994). Investment appraisal and financing decisions, Chapman & Hall, London.

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2.0 INTRODUCTION OF ECONOMICS

2.1 HISTORY OF ECONOMIC THOUGHT

2.1.1 Meaning of History of Economic Thought:

History of Economic Thought as the title implies deals with the origin and development of economic
ideas and their interrelations. It is a historical account of economic doctrines. Prof. Haney defined it
as “a critical account of the development of economic ideas, searching into their origin,
interrelations and manifestations”.

According to Prof. Bell, “It is the study of the heritage left by the writers on economic subjects”.

Prof. Schumpeter holds that “economic thought is the sum total of all the opinions and desires
concerning economic subjects especially concerning with public policies of different times and
places”. Schumpeter further says that the history of economic thought traces the historical change
of attitudes. It also speaks about the economic problems and the approaches to those problems.

History of Economic Thought is different from Economic History and History of Economics. While
History of Economic Thought deals with the development of economic ideas, Economic History is a
study of the economic development of a country. On the other hand, History of Economics deals
with the science of economics.

Even though Economic History and History of Economic Thought constitute separate branches of
study, they are closely related. Economic ideas are directly and indirectly motivated by the
economic conditions and environment of the country. Ideas and environment are equally important
and hence the close relationship between History of Economic Thought and Economic History.

The history of the development of economic ideas can be studied under three periods, namely:
1. Ancient,
2. Medieval and
3. Modern.

Further, the history of Economic Thought may be broadly divided into two parts. The first part deals
with the origin and the development of economic ideas before the development of economics as a
science. The second part deals with the economic ideas after the development of economics as a
science.

History of economic thought can be studied and analysed by adopting different approaches:
1. Chronological approach
2. Conceptual approach
3. Philosophical approach

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 4. Deductive (or) Classical approach
5. Inductive approach
6. Neo-classical approach
7. Welfare approach
8. Institutional approach and
9. Keynesian approach.

1. Chronological approach: In this approach, economic ideas are discussed in order of time. The
economic ideas of different economists can be presented year-wise and can be studied. In this
approach we can find a continuity in the economic ideas of different economists.

2. Conceptual approach: It speaks about the evolution of different economic concepts (ideas) and
the interdependence of these concepts. Conceptual approach can also be referred to as ideological
approach.

3. Philosophical approach: This was first adopted by the Greek philosopher, Plato. In the past,
economics was considered as a hand maid of ethics. Naturally philosophical approach was adopted
by the early writers to discuss the economic ideas.

4. Deductive approach: The classical economists adopted deductive method. They believed in the
universal application of economic laws.

5. Inductive approach: The Historical School emphasised the inductive method. These economists
believed that the laws of economics are not universal in nature.

6. Neo-classical approach: This approach aims at improving the classical ideas by modifying them.
Neo-classical approach was first adopted by Marshall. The Neo-classical approach believed that
“Induction and Deduction are necessary for the science of economics just as the right and left feet
are necessary for walking”.

7. Welfare approach: It aims at providing the basis for adopting policies which are likely to
maximise social welfare.

8. Institutional approach: The institutionalists questioned the validity of classical ideas and gave
importance to psychological factors.

9. Keynesian approach: A major development in modern economics is associated with the name of
J.M. Keynes (The British economist John Maynard Keynes developed this theory in the 1930s). His
approach is new and different from the classical school. It takes into consideration the operation of
business cycles that affect the entire economic policies. Keynesian approach deals with the problem
of the economy as a whole.

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2.1.2 Significance of History of Economic Thought:

There are two views with regard to the importance of study of History of Economic Thought. One
group of economists believed that there is no need to study the history of Economic Thought
because it is a history of errors. Whereas another group believed that one cannot possess
knowledge of any economic doctrine until one knows something of its history.

So, a study of History of Economic Thought is important for the following reasons:
1. The study of History of Economic Thought clearly shows that there is a certain unity in
economic thought and this unity connects us with ancient times.
2. The study of Economic Thought will help us to understand the origin of economics.
3. Economic ideas have been instrumental in shaping the economic and political policies of
different countries.
4. Economic ideas are conditioned by time, place and circumstances.
5. A study of Economic Thought provides a broad basis for comparison of different ideas. It will
enable a person to have a well-balanced and reasonable judgement.
6. Through the study of Economic Thought, the student will realise that economics is different
from economists.
7. The study of the subject helps us to avoid the mistakes committed by earlier economic
thinkers.
8. The study of History of Economic Thought will enable us to know the person responsible for
the formulation of certain important principles.

In short, the significance of the study of History of Economic Thought can hardly be
overemphasized. It is an important tool of knowledge.

2.1.3 Difficulties in the Study of History of Economic Thought:

However, it must be remembered that History of Economic Thought is selective and interpretative
in nature. In other words, the authors select those topics in which they are interested. They also
explain the facts in their own manner.

If authors leave out certain important facts and emphasize others, their judgements are biased. For
example, the famous book, “A History of Economic Doctrines”—written by Gide and Rist leaves out
discussions on ancient economic ideas, medieval economic thought and the contributions made by
Mercantilists (Mercantilism is an economic practice by which governments used their economies to
augment state power at the expense of other countries. Governments sought to ensure that
exports exceeded imports and to accumulate wealth in the form of bullion (mostly gold and silver)).

Further, complete history should deal with modern economic thought also. That means it should
include the contributions made by Marshall, A.C. Pigou, J.M. Keynes etc. In this respect it can also
be said that Alexander Gray’s “The Development of Economic Doctrines” is incomplete. In-spite of

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the above defects, the study of History of Economic Thought enables one to understand the subject
clearly.

2.2 DEFINITION OF ECONOMICS

Economics can be defined in many ways. In its most simple and concise definition, economics is the
study of how society uses its limited resources. Economics is a social science that deals with the
production, distribution, and consumption of goods and services. Economics focuses heavily on the
four factors of production, which are land, labor, capital, and enterprise. These are the four
ingredients that make up economic activity in our world today and can each be studied individually.

However, different economists developed different definitions of economics. For example:

Economics is the study of mankind in the ordinary business of life.

- Alfred Marshall

Economics is the science which studies human behaviour as a relationship between ends and scarce
means which have alternative uses.
- Lionel Robbins

Economics comes in whenever more of one thing means less of another.

- Fritz Machlup

The theory of economics is a method rather than a doctrine, an apparatus of mind, a technique of
thinking, which helps its possessor to draw correct conclusions.
- John Maynard Keynes

Economics is the study of the use of scarce resources to satisfy unlimited human wants.
- Richard Lipsey

The above attempts to define the discipline of economics in a short, concise sentence indicate that
the discipline has both individual and social dimensions. The discipline straddles the areas of arts
and science, of theory and policy, and provides a fascinating mechanism for interpreting human
behaviour, individually and collectively.

2.3 MACRO AND MICRO ECONOMICS

Economics is split into the following two broad categories of study:

2.3.1 Macroeconomics:

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The branch of economics that studies the overall working of a national economy. It is more focused
on the big picture and analysing things such as growth, inflation, interest rates, unemployment, and
taxes. When you hear that Bank of Uganda is raising interest rates or that the national
unemployment rate is 2.3%, you are hearing about macroeconomic topics.

Macroeconomics can also be defined as the study of the performance, structure, behavior and
decision-making of an economy as a whole. Macroeconomists focus on the national, regional, and
global scales. For most macroeconomists, the purpose of this discipline is to maximize national
income and provide national economic growth. Economists hope that this growth translates to
increased utility and an improved standard of living for the economy’s participants. While there are
variations between the objectives of different national and international entities, most follow the
ones detailed below:

• Sustainability occurs when an economy achieves a rate of growth which allows an increase
in living standards without undue structural and environmental difficulties.
• Full employment occurs when those who are able and willing to have a job can get one.
Most economists believe that there will always be a certain amount of frictional, seasonal
and structural unemployment (referred to as the natural rate of unemployment). As a
result, full employment does not mean zero unemployment.
• Price stability occurs when prices remain largely stable and there is not rapid inflation or
deflation. Price stability is not necessarily zero inflation; steady levels of low-to-moderate
inflation is often regarded as ideal.

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 • External balance occurs when exports roughly equal imports over the long run.
• Equitable distribution of income and wealth among the economy’s participants. This does
not, however, mean that income and wealth are the same for everyone.
• Increasing Productivity over time throughout the national economy.

To achieve these goals, macroeconomists develop models that explain the relationship between
factors such as national income, output, consumption, unemployment, inflation, savings,
investment and international trade. These models rely on aggregated economic indicators such as
GDP, unemployment, and price indices.

On the national level, macroeconomists hope that their models help address two key areas of
research:
• the causes and consequences of short-run fluctuations in national income, otherwise known
as the business cycle, and
• what determines long-run economic growth.

Key Terms
• deflation: A decrease in the general price level, that is, in the nominal cost of goods and
services.
• Macroeconomics: The study of the performance, structure, behaviour, and decision-making
of an economy as a whole, rather than individual markets.
• inflation: An increase in the general level of prices or in the cost of living.

Key Points
• For most macroeconomists, the purpose of this discipline is to maximize national income
and provide national economic growth.
• The most common macroeconomic topics of study for national entities are sustainability,
full employment, price stability, external balance, equitable distribution of income and
wealth, and increasing productivity.
• Macroeconomists hope that their models help address two key areas of research: the
causes and consequences of short-run fluctuations in national income (otherwise known as
the business cycle) and what determines long-run economic growth.

2.3.2 Microeconomics:

The branch of economics that studies how households and businesses reach decisions about
purchasing, savings, setting prices, competition in business, etc. It focuses at the individual level,
while macroeconomics looks at the decisions that affect entire countries and society as a whole.

Microeconomics deals with the economic interactions of a specific person, a single entity, or a
company. These interactions, which mainly are buying and selling goods, occur in markets.

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Therefore, microeconomics is the study of markets. The two key elements of this economic science
are the interaction between supply and demand and scarcity of goods.

Supply and Demand Graph: Microeconomics is based on the study of supply and demand at the personal and
corporate level.

One of the major goals of microeconomics is to analyze the market and determine the price for
goods and services that best allocates limited resources among the different alternative uses. This
study is especially important for producers as they decide what to manufacture and the
appropriate selling price. Microeconomics assumes businesses are rational and produce goods that
maximizes their profit. If each firm takes the most profitable path, the principles of microeconomics
state that the market’s limited resources will be allocated efficiently.

The science of microeconomics covers a variety of specialized areas of study including:

• Industrial Organization: the entry and exit of firms, innovation, and the role of trademarks.
• Labour Economics: wages, employment, and labour market dynamics.
• Financial Economics: topics such as optimal portfolios, the rate of return to capital, and
corporate financial behaviour.
• Public Economics: the design of government tax and expenditure policies.
• Political Economics: the role of political institutions in policy.
• Health Economics: the organization of health care system.
• Urban Economics: challenges faced by cities, such as sprawl, traffic congestion, and poverty.
• Law and Economics: applies economic principles to the selection and enforcement of legal
regimes.
• Economic History: the history and evolution of the economy.

Key Points

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 • One of the major goals of microeconomics is to analyse the market and determine the price
for goods and services that best allocates limited resources among the different alternative
uses.
• Microeconomics assumes businesses are rational and produce goods that maximize their
profit.
• The science of microeconomics covers a variety of specialized areas of study including:
industrial organization, labour economics, financial economics, public economics, political
economy, health economics, urban economics, law and economics, and economic history.

Key Terms
• microeconomics: That field that deals with the small-scale activities such as that of the
individual or company.
• Scarcity: an inadequate amount of something; a shortage

2.3.2 Key Differences between micro- and macroeconomics

Microeconomics focuses on individual markets, while macroeconomics focuses on whole

economies.

Micro economics involves;

• Supply and demand in individual markets.

• Individual consumer behaviour. e.g. Consumer choice theory
• Individual labour markets – e.g. demand for labour, wage determination.
• Externalities arising from production and consumption. e.g. Externalities
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Macro economics involves;

• Monetary / fiscal policy. e.g. what effect does interest rates have on the whole economy?
• Reasons for inflation and unemployment.
• Economic growth
• International trade and globalisation
• Reasons for differences in living standards and economic growth between countries.
• Government borrowing

Stemming from Adam Smith’s seminal book, The Wealth of Nations, microeconomic and
macroeconomics both focus on the allocation of scarce resources. Both disciplines study how the
demand for certain resources interacts with the ability to supply that good to determine how to
best distribute and allocate that resource among many consumers. Both disciplines are about
maximization: microeconomics is about maximizing profit for firms, and surplus for consumers and
producers, while macroeconomics is about maximizing national income and growth.

The main difference between microeconomics and macroeconomics is scale. Microeconomics

studies the behaviour of individual households and firms in making decisions on the allocation of
limited resources. Another way to phrase this is to say that microeconomics is the study of markets.

In contrast macroeconomics involves the sum total of economic activity, dealing with the issues
such as growth, inflation, and unemployment. Macroeconomics is the study of economies on the
national, regional or global scale.

This key difference alters how the two approach economic situations. Microeconomics does
consider how macroeconomic forces impact the world, but it focuses on how those forces impact
individual firms and industries. While macroeconomists study the economy as a whole,
microeconomists are concerned with specific firms or industries.

Many economic events that are of great interest to both microeconomist and macroeconomists,
though they differ in how they analyse those events. A shift in tax policy would interest economists
in both disciplines. A microeconomist might focus on how the tax might shift supply in a specific
market or influence a firm’s decision making, while the macroeconomist will consider whether the
tax will translate into an improved standard of living for all of the economy’s participants.

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