Civil Engineering Reference
In-Depth Information
Figure 3.1
Product and factor allocation via the price mechanism
In this simplified model households supply their services - labour, capital, land and
entrepreneurial skills - to firms that demand them for production. The prices paid in
factor markets are the balancing items that determine resource allocation. In product
markets, firms supply goods and services to households that demand them, and prices
provide the balancing item to determine distribution.
Factor
markets
Firms
Households
Product
markets
satisfaction. Producers, and owners of resources (and for most people this is their
own labour power), seek to obtain as large a reward as possible in an attempt to
maximise profit.
If consumers want more of a good than is being supplied at the current price,
this is indicated by their willingness to pay more to acquire the good - the price is
'bid up'. This in turn increases the profits of those firms producing and supplying
the good - and the incomes paid to the factors producing that good increase. As a
result, resources are attracted into the industry, and supply expands.
On the other hand, if consumers do not want a particular product, its price will
fall, producers will lose money and resources will leave the industry. This is precisely
what happened in the 'new build' market during the recession that followed the
credit crunch in 2007. The demand for new houses declined and prices fell; as a
result, producers either concentrated on other construction work or went bankrupt.
Consequently, between 2008 and 2010, the completion of new homes fell by more
than 30 per cent, reaching the lowest level since 1924.
In simple terms, therefore, the price system indicates the wishes of consumers
and allocates the productive resources accordingly. Or, in the terms we used in
Chapter 2
, the price mechanism determines
what
is produced,
how
it is produced
and
for whom
is it produced. Now we shall examine how well these general
principles apply to the UK construction industry.
