Civil Engineering Reference
In-Depth Information
The pattern of oscillation around the equilibrium point is accounted for by
the inherent time-lag in producing construction output, by imperfect information
and, to a lesser extent, by the inflexible nature of the construction market. The
oscillating pattern also provides the explanation for the name of this model - the
cobweb theorem.
Obviously, there are limitations to this generalised theoretical model. First,
builders are aware of the cyclical nature of their industry and attempt to make
adjustments to relate starts to expected prices rather than current prices. Second,
they can choose to manipulate their stocks by holding property off the market
during the low price part of the cycle. Nonetheless, the economic analysis is still
useful since it highlights the root of a problem, and amplifies the need for a stable
economy to secure the necessary business confidence for construction firms to
maintain a steady rate of production.
Key Points 14.4
❍
The adaptive-expectations hypothesis argues that people make predictions
about the current year's rate of inflation based on the previous year's rate
of inflation.
❍
The rational-expectations hypothesis assumes that individuals form
judgements by examining all available information. That means that
economic forecasters not only look at past data and trends but also at the
impact of current and/or anticipated future government policy.
❍
The wage-price spiral represents the inflationary process as one in which
incomes and prices continually chase each other in an upward direction
(see
Figure 14.5
).
❍
Construction firms operate in a different business environment as
significant time-lags exist before any planned changes in output can be
realised. These production time-lags together with several structural
rigidities cause construction markets to be unstable.
❍
It is rational expectations that determine the speed and direction of
price changes.
