Construction Industry Economics: Demand, Supply, and Market Structure

This report provides an economic analysis of the UK construction industry, focusing on market structure, determinants of demand and supply, and demand elasticity. The report examines the industry background, highlighting its contribution to the UK's GDP and employment. It classifies the market structure as monopolistic, analyzing the characteristics of firms like VINCI construction. The report explores the determinants of demand and supply, including income, price expectations, and the number of sellers. Furthermore, it discusses demand elasticity and its implications for the industry. The report concludes with a discussion of a recent event, climate change, and its substantial impact on the construction industry, affecting profitability, supply, and demand. The analysis includes relevant illustrations to support the findings.

Economics and
International Trade

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
1. Industry background ...............................................................................................................3
2. An analysis of market structure ..............................................................................................4
3. Determinants of demand and supply ......................................................................................6
4. Demand elasticity....................................................................................................................8
5. A recent event that has substantial impact on construction industry......................................9
CONCLUSION .............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
Economics is a term that represents a study of social science which is related to how
people put scarce resources for production, distribution and consumption individually and
jointly. It has two branches; one deals with the aggregate behaviour of national economy,
regional economy while other deals with the behaviour of individuals. The present report will
highlight the scenario of construction industry in UK, the type of market in which the industry
exists, determinants of demand and supply for industry's product or services. Further, the report
will show the elasticity of product or service. VINCI construction is construction , civil
engineering and facilities management organisation. The entity is a subsidiary of VINCI group
based in France. In UK, the company has employed over 9000 employees.
MAIN BODY
1. Industry background
Construction is that sector of economy which is concerned with preparation land,
modifications, construction, repairs of structures and other property. This industry is a significant
reflection of nation's overall economy (Kuifengl, 2015). UK's construction industry accounts for
about 6 % that is around £113 billion of the country's total GDP. The construction output of the
country contains a quarter of construction output from public sector while remaining three
quarters from private sector. The construction industry mainly has three areas such as :
 social and commercial which is around 45 % of total construction activities,
 Residential which is 40%
 Infrastructure which is 15 %.

Illustration 1: UK's construction industry statistics
(Source : Construction industry: statistics and policy,2018)
About 60 % of the total construction output comes in the form of new build while 40 %
consist of maintenance and repairs. The industry output by 14 % in Q3 of 2018 as compared to
Q1 in 2017.
The industry employs significant number of people in the United Kingdom. The
industry is said to have provided about 3 million jobs to people in UK, which is the 10 % of the
total employment. The construction industry in the country falls under the governance of
Department for Communities and Local Government (Ek Styvén, and Strandberg, 2017). In
present study, VINCI construction company is taken and the concept of demand and supply will
be studied in context of this company.
2. An analysis of market structure
Market structure refers to the general and organisational characteristics of the market
which reflects the nature of competition that exists for goods and services in a particular market.
There are basic four types of market structure that exists in an economy which are :
 perfect competition market
 monopolistic market
 Oligopoly market
 Monopoly market

VINCI construction company belongs to market structure called as monopolistic market. This is
because of the following reasons :
Differentiation : The construction industry is marked with innovation and
differentiation. This is one of the main characteristic of the monopolistic market (Cussen, 2015).
VINCI focuses on designing and creating highly different and innovative buildings for its
customers for the purpose of increasing returns and market share.
Number of firms : There are number of firms in this industry who are offering similar
utility products and services but are not identical. There are about 100 big construction
companies in UK which offers building construction and repairs & maintenance services to their
customers (Top 100 Construction Companies 2017, 2019).
Pricing Power : The companies operating in this market are price setters rather than
price takers. This power comes from the fact that organisations focus their efforts on making
products and services highly innovative from others. VINCI company price maker of its services
because of its differentiated high quality services. However, the price making power is very
nominal. Significant changes in the prices can cause the customers to shift their preferences from
VINCI to other company. This is because the demand for the services and products are highly
price elastic.
Demand Elasticity : Because of the existence of number of firms in the market engaged
in similar business, the demand is highly elastic (SIJABAT, 2017). This means the
responsiveness of demand to price changes is high. For example, if VINCI products and service
suddenly costs 25 % higher than before, the existing customers will not think twice before
moving on to some another company.
Economic profit : Another characteristic of monopolistic market is economic profit.
These are other accounting profits and represent opportunity profits. This means that VINCI can
make some extra economic profit in the short run.
Competition : The range of competition in monopolistic market can be described as the
middle base between pure competition and monopoly markets. This means that competition is
very high because of the presence of high number of firms and the demand his highly elastic.

Also, the economic profit in the short run is positive but in the long run, it becomes zero. This
altogether makes the firms fiercely competitive.
The VINCI construction faces intense competition from number of competitors such as
Shimizu, Jeronimo Concrete, Freyssinet, Skanska, Grupo ACS, SCG, Balfour Beatty, Kier
Group, Interserve, Morgan Est, Amey plc etc. These are major competitor of the Vinci
corporation.
3. Determinants of demand and supply
Illustration 2: demand curve
(Source : Demand, Its Explanation, and Its Impact, 2018)
Demand is defined as the quantity of commodity or services, that consumers are willing
to pay at given prices during a period. The law of demand states that as the prices of the good
and services rises, the demand for the same decreases and if the price falls, then demand
increases.
Determinants of demand of products of VINCI which is creating new buildings :
 Normal Goods : This is one of the factor that affects the demand for VINCI's product.
When there will be increase in the income of consumer, demand for repairs and
construction of buildings will increase because people can afford such capital expenditure
because of the increased income. Likewise, when the income of consumers will decrease,
the demand for the company's products and services will fall (Abongile, 2015). This

shows the direct relationship between the income of consumer and demand for company's
products.
 Price Expectations : If the people expect that there will be increase in the prices of
creating a building or for repairs and modifications in the near future, then the demand
for the same will increase in the current period and demand will fall when people expects
that prices of the material supplies and other construction products in the upcoming
period.
Determinants of supply :
Supply refers to the total amount of specific commodity of goods or services supplied by
all the firms in the market. According to the supply law,if supply of the commodity increases, the
prices also decreases and the supply is less than the market demand, the prices for the
commodity or services rises.
There are different determinants that influence the supply of product of VINCI
construction that are follows :
Number of sellers : If there are large number of sellers in the market, then supply of the
construction products such as building creation and repairs & modifications services will
increase. This will fall the prices of the products and services in the market, according to which
the VINCI prices would also go down.

Technology : Advancement in the technology helps in reducing the cost of production of
the goods and services. This in turn results in the increase in the supply of the commodity or
services in the market. And as per the law of supply, if supply increases, the prices are fallen
down due to availability of abundant services from number of sellers.
These are the determinants of demand and supply that are the most influential factors that
affects the demand and supply of VINCI construction.
4. Demand elasticity
Elasticity of demand can be defined as the degree to which the demand is affected by the
change in the prices of goods or services (Aureli, and Mudu, 2017). In other words, elasticity of
demand is the responsiveness of quantity demanded of VINCI construction company's products
and services in relation to changes in the prices of the goods or services. The demand of the
goods or services depend upon three major components :
 price
 price of related goods
 income of consumers
There are different types of elasticity of demand which are given below :
 Price elasticity : It measures the degree of change in demand in relation to price
(Cavaghan, 2017).
 Income elasticity : It measures the degree of change in demand in relation to income of
consumers.
 Cross elasticity : It measures the degree of change in demand in relation to change in
price of different commodity other then the supplier's commodity.

Illustration 3: Demand elasticity
(Source : Price Elasticity Of Demand, 2019)
F
By analysing the market in which VINCI company operates, the demand elasticity of the
products and services is very high. This means that demand significantly changes due to the
change in the prices of the company's products which are building creation and repairs &
modifications services (Karabulut, and Shahinpour, 017). The reason for high elasticity for the
company's products and services is the availability of number of sellers who are ready to sell the
goods and services ate the same prices. This wide variety available with the customers facilitate
them to shift to another company which in tun results in the decrease in the demand for the
VINCI products and services. If there are larger number of substitutes present in the market, it
increases the demand elasticity of the commodity and services of the company.
5. A recent event that has substantial impact on construction industry
As per the global reports, there is a warning that climate is changing in a drastic manner and it is
expected to affect the world worst than ever. The global warming is increasing at an
unimaginable rate. The weather is going to be 2.7 degrees more warmer than expected and such
conditions are going to affect the economy of the world (Climate change impacts worse than
expected, global report warns.2018).

It is a well known fact that climate change is a factor that substantially affects the
profitability, supply, demand and prices of the construction products and services. VINCI has to
take up projects by considering the extreme climatic conditions at the locations. Extreme
summer, flood seasons, etc., affects the operations of construction of buildings and repairs &
maintenance. Severe weather conditions added up to the cost production of VINCI. It impacts the
materials, machines, labours , quality of work and importantly the quantity of the work of
construction. This altogether decreases the profitability of the company and the rate of
production becomes slow.
The supply of the company's products and services gets affected as it is unable to carry
out the construction of building with as much efficiency as in normal conditions. Also, in the
event worse conditions, the demand of getting a new building and repairs are low because the
prices of the material, labour, machines, energy etc., are more, which discourages customers to
demand the services of construction.
Overall impact is that both the demand and supply of construction products and services
decreases in the worse weather conditions. This can be seen through an example which given
below:

Illustration 4: decrease in demand and supply
(Source: AmosWEB is Economic, 2019)
CONCLUSION
From the above project report, it can be summarised that construction industry in UK has
a substantial effect on the economy of the country as it contributes 6 % to the total GDP. The
industry has employed over 2.4 millions of people that makes it a large employment sector. In
the study, it was seen that expectations of price rise in near future and normal goods are two
determinants that affects the VINCI construction company. Further, it was seen that demand
elasticity of VINCI's products and services are highly elastic because of the availability of
different substitutes in the market.