Civil Engineering Reference
In-Depth Information
In terms of
Figure 7.5,
the industry as a whole should experience a downward shift
in its long-run average cost curve reflecting a decrease in costs at every level of
output.
Of course, external change will not always benefit the member firms of a
particular industry. For example, as the construction industry grows larger,
shortages of specific materials, land and/or skilled labour may occur. This would
push up costs per unit of output across the whole industry - or, in the terms
employed above, the industry would experience external diseconomies of scale.
A Final Note on Techniques
Before progressing further with the theory of the construction firm, it may be useful
to emphasise three points which should help you avoid any confusion when studying
other economic textbooks.
1
By now you should understand how economists use cost curve diagrams to
provide a summary of their ideas. You should realise, therefore, that these
diagrams are never intended to be more than a visual image - an aide-memoire.
They never form a precise reflection of a particular firm.
2
Most microeconomic theory has been developed with manufacturing as the
focus and it does not, therefore, always smoothly translate to the construction
industry. As Ive and Gruneberg (2000: 150) emphasise, economic theory relates
to the manufacturing of mass-produced products, whereas construction is
oriented towards individual projects that tend to be 'one-off productions' (with
the possible exception of housing). Indeed, in most mainstream textbooks on
economic theory the construction industry is not even indexed.
3
Remember that we commence from the basic assumption that all firms in
all sectors seek to maximise their profits. This is an important cornerstone of
economic theory. Economists pursue this objective with an academic zeal that
regards even the marginal detail as crucially significant. This will be developed
further in the next chapter.
Key Points 7.5
❍
External economies of scale relate to a whole industry; whereas internal
economies of scale arise from the growth of one firm, regardless of what is
happening to other firms.
❍
Good examples of external economies of scale arise from the work of
government departments that seek to deliver a marked improvement in the
business performance of construction firms at home and abroad.
❍
The cost-curve techniques associated with the theory of the firm have
been developed for, and particularly apply to, the profit maximising
manufacturer.
