Civil Engineering Reference
In-Depth Information
characterised as market-driven. Because trading organisations in the
construction industry are by defi nition not vertically integrated, they
are forced to fi nd and buy the services of other fi rms in order to deliver
their part of the project.
Firms in construction therefore rely on transactions with other fi rms
to obtain the necessary skills, materials and plant they require, as and
when they need them. Transactions involve buyers on the demand side
and sellers on the supply side. In its simplest form the interaction
between supply and demand allows the two sides to a transaction to
arrive at a price both parties feel is acceptable, given the constraints set
by the other party or parties to the deal.
A simple textbook analysis of supply and demand is suffi cient to
understand the challenges faced by the procurement team of the London
2012 Olympic Games, or any other major capital works programme.
Starting with the basics: according to the fi rst law of demand and assum-
ing all else remains the same, the higher the price the less will be
demanded, and the lower the price the more will be demanded. This is
shown in Figure 2.1, where price is on the vertical axis and quantity is
shown on the horizontal axis. Assume fi rms compete for a given project
or amount of work available. This is the amount demanded and is rep-
resented by the vertical demand line. Regardless of the price, the con-
struction work on offer remains the same. As price decreases from P
2
to
P
1
, the quantity demanded remains at Q
1
.
However, according to the law of supply, the higher the price the more
will be supplied, and the lower the price, the less will be supplied -
Supply
ex ante
Price
Demand
Supply
ex
post
1
P
2
2
P
1
3
Q
1
Q
2
0
Quantity
Figure 2.1
The manipulation of supply.
