The Application of Ten Principles of Economics in

the Real Estate Industry

Course: Microeconomics
Course Code: E201
Batch: BBA 25th

Submitted to Submitted by GROUP 14

A.T.M. Jakaria Khan Aateeya Saabeen | Roll 10

Lecturer Radh Sharer Ahmed Arnab | Roll 20

Institute of Business Administration Shegufta Armin Ahsan | Roll 26

University of Dhaka Mohammad Arefin Choudhury | Roll 98

Date of Submission: 15th November, 2017

TEN PRINCIPLES OF ECONOMICS IN THE REAL ESTATE INDUSTRY 1

Table of Contents

Abstract ………………………………………………………….......………………………..
2
1. Introduction…………………………………………………………………………………
3
2. Ten Principles of Economics………………………………………………………………. 4
2.1. How people make decisions……………………………………………………... 4
2.1.1. People face trade-offs………………………………………………….. 4
2.1.2. The cost of something is what you give up to get it…………………… 5
2.1.3. Rational people think at the margin…………………………………….
5
2.1.4. People respond to incentives……………………………………………
5
2.2. How people interact with each other……………………………………………...
6
2.2.1. Trade can make everyone better off…………………………………….
6
2.2.2. Markets are usually a good way to organize economic activities………
6
2.2.3. Governments can sometimes improve market outcomes……………….
7
2.3. How the economy as a whole works……………………………………………...
7
2.3.1. A country’s standard of living depends on a country’s ability to
produce goods and services……………………………………………. 7
2.3.2. Prices rise when the government prints too much money……………... 8
2.3.3. Society faces a short-run trade-off between inflation and
unemployment…………………………………………………………. 8
3. Conclusion…………………………………………………………………………………. 8
4. References ………………………………………………………………………………...10
TEN PRINCIPLES OF ECONOMICS IN THE REAL ESTATE INDUSTRY 2

Abstract

Economics is the study of how a society manages its scarce resources. In most of the places,
this is not done by the government or by a single person. It is rather decided by all the
households and firms that exist in that society. Economics, thus, studies how these entities
make decisions, how they interact, and also how the economy works as a whole. Although
the economy has many aspects, it is united by several core ideas. They can be termed as the
Ten Principles of Economics. The purpose of this paper is to define these ten principles and
incorporate it to the real estate industry in true-world scenarios.
TEN PRINCIPLES OF ECONOMICS IN THE REAL ESTATE INDUSTRY 3

The Application of Ten Principles of Economics in the Real Estate

Industry

1. Introduction

Real estate is the property, land, buildings, air rights above the land and underground rights
below the land. Real estate also refers to producing, buying and selling real estate. But in our
paper, we are referring to real estate as in producing, buying, and selling real estate,
especially flats, apartments, and land development. After our independence in 1971, real
estate and housing emerged in our country as a prime sector. It generated much interest along
the years and many people got involved in it. This sector plays a vital role in every nation’s
economic development and industrialization. Similarly, real estate has gradually emerged as
an important sector of the economy in our country. It is a huge stimulator of economic
activities, and its effects are far reaching, having diverse and multifaceted impacts on the
overall economy of the country. It does not only help eradicate unemployment, but it also
helps increase demand for many other sectors, including steel, cable and electrical, cement,
wall paint, tiles and sanitary ware, rod, glass, brick making etc. Furthermore, the sector is
contributing to a huge share of the GDP in Bangladesh. Almost 12 to 15% of Bangladesh’s
national GDP is contributed through the real estate and housing industry either directly or
indirectly. The annual turnover of this business is about BDT 20 billion.
The real estate sector in Bangladesh has been in place since the 1970s, but it has varied
greatly in number and reach. The sector is an indispensable part of today’s economy, making
up almost 7% of the national GDP in the fiscal year 2013-14 (BBS, 2014). Real estate and
housing association of Bangladesh (REHAB) is the main association comprising all the
companies of the sector. It declared that real estate and its related industries backed about
12% to the GDP in 2014.
During 1970s the number of companies in this business was fewer than 5. In 1988 the
number was 42, which increased to about 1081 in 2013.
TEN PRINCIPLES OF ECONOMICS IN THE REAL ESTATE INDUSTRY 4

YEAR NUMBER OF COMPANIES

1970 5

1988 42

2003 250

2013 1081

At present, the top real estate companies in Bangladesh are: Alliance Group, Amin
Mohammad Group, Anwar Landmark, BTI, Concord, Sheltech, Bangladesh Development
Group, Bashati Consortium Limited, and ABC Real Estates Limited.

2. Ten Principles of Economics

2.1. How People Make Decisions

2.1.1 People Face Trade Offs

Every decision taken means that one thing is chosen over another. Everything comes as a
cost, something else has to be sacrificed for doing another. It is also true for the real estate
industry.
The first tradeoff comes in the form of locations. If one invests on real estate on one location,
he loses another attractive one. Some target the highly urbanized areas, while others work on
developing the semi-urban or even rural areas.
A real estate business can also sometimes quite easily shift to construction business with the
technical expertise they have. They can easily start projects which involve industries and
other government constructions like hospitals, ports, power plants or even roads and
highways. Many companies in Bangladesh including big and successful ones like Concord
Group, SEL and Advanced Development Technologies started off their businesses as
Engineering Consultancy and Construction firms. On the other hand, companies like Sheltech
started off as real estate developers but later joined the construction and consultancy business.
From a buyer’s perspective, there are also tradeoffs. One can simply rent an apartment rather
than buying one. He/she can invest that money elsewhere.
TEN PRINCIPLES OF ECONOMICS IN THE REAL ESTATE INDUSTRY 5

2.1.2. The Cost of Something is What You Give Up to Get It

As one faces tradeoffs, the decision making process requires cost benefit analysis of all the
alternatives. The actual cost of something is not just the explicit costs that are observed
easily. The economic cost rather includes the benefits that would have generated if one had
chosen the next best alternative.
For the real estate companies, it can be construction or consultancy. It can also be another
project at a different location that they chose not to pursue.
For the customers, it can be the profit they could have received from investing it in other
businesses, or even bank interests that they would get from their money.

2.1.3. Rational People Think at the Margin

The main purpose of doing a business is to make gains. Firms thus always strive to maximize
their profits. A real estate firm has to decide how many employees and construction workers
it would hire for a project. More construction workers might result in faster completion of the
project, but would also cost the firm more. Again, at a certain point, the marginal productivity
reaches zero, and further addition of workers will not give any added benefits. It might also
hamper the efficiency. So the firm would hire just the right amount of personnel it needs to
get the job done in the fastest time without risking its profitability. Again, the firm would not
take on new projects if they had many ongoing projects since it would stretch their
effectiveness and make it very hard to coordinate between them.

2.1.4. People Respond to Incentives

The biggest incentive for the real estate business boom in Bangladesh was the provision to
legalize undisclosed money (informally termed as “Black Money”) through the acquisition of
apartments and lands. This encouraged many such people and organizations to invest more
into the real estate industry, shooting up the demands and skyrocketing prices.
Again, more examples of incentives might be the reduction of taxes on capital machinery and
raw materials needed for this industry. For example, if the VAT is relieved on steel-rods and
cement, it will make investors more interested in the real estate sector.
TEN PRINCIPLES OF ECONOMICS IN THE REAL ESTATE INDUSTRY 6

Customers will also respond to massive discounts, which are usually given in real estate fairs.
The government also creates house-building funds to distribute home-loans in low interest
rates to facilitate people who are buying apartments. These mostly come for government
officials.

2.2 How People Interact with Each Other

2.2.1. Trade Can Make Everyone Better Off

No business can exist without trade. This is because it is impossible for anyone to specialize
in all business activities which are usually diverse in nature. In the real estate sectors, the raw
materials can be sourced even to other countries from where old ships are brought and broken
by the Ship-breaking industries, steel is them re-rolled by re-rolling industries and then made
into steel rods which are necessary for building infrastructures. Other raw materials like
cement and fittings are also sourced from different industries.
Real estate development companies in developed countries also bring in both skilled and
unskilled labors from other countries. A huge chunk of our foreign remittance comes through
construction workers who work abroad.
The landowners might have a huge amount of land at their disposal, but might not have the
technical expertise or the required capital to make a building on their own. They can also
benefit from this trade by giving their lands to the developer companies and receive ready-
made apartments. This benefits both the landowner and the real estate developers. Some
people who could not own their own homes could also afford apartments in such a building in
this way.

2.2.2. Markets Are Usually a Good Way to Organize Economic Activity

In many communist societies, houses are allotted to all the families by the government. Every
house is thus pretty much the same. Huge colonies are made through government projects
which results in various problems. People do not take care of the houses they are allotted,
resulting in the houses becoming slowly uninhabitable. People also don’t get houses
according to their preferences. Some might require houses which are more spacious, some
might prefer smaller and compact houses. There might also be a discrepancy between the
TEN PRINCIPLES OF ECONOMICS IN THE REAL ESTATE INDUSTRY 7

amount of housing required and the amount of available houses. Wastage of resources might
also occur where houses might be made in places where there is no need for additional
houses.
Through privatization of real estate industries, houses can be established according to the
demands. Premium housing can be offered to those who want them. The houses can also be
customized to individual needs. Some might prefer compact apartments in cites, other might
want duplex houses in semi-urban areas.

2.2.3. Governments Can Sometimes Improve Market Outcomes

Government regulations are very strict in the real estate industry regarding the building
codes. An approval by RAJUK is necessary before any building is constructed, which is to
ensure that the buildings have appropriate safety measures and that they do not disrupt any of
RAJUK’s central plans.
Sometimes the government also restricts some areas from real estate projects. These can be
farmlands, or forest resources which are being conserved for the betterment of the state in the
long run.
The consumers have to pay city corporation tax, holding tax, ‘khazna’ etc. as well as the one-
time registration fees for the lands or apartments they buy. This can be justified by the
security and the basic services that the government provides them.

2.3. How the Economy as a Whole Works

2.3.1. A Country’s Standard of Living Depends on a Country’s Ability to Produce Goods and
Services

A country’s standard of living has a very close relation with the amount of people who have
access to affordable housing facilities. Again, the productivity and efficiency of the real
estate development is instrumental in the steady growth of this sector.
Government as well as the companies has to ensure that the technological development is
always occurring in this sector and that the best available technology is being used. Proper
skill-development and expertise of the people working in this sector also needs to be ensured
TEN PRINCIPLES OF ECONOMICS IN THE REAL ESTATE INDUSTRY 8

along with their education and access to proper tools. This will in turn improve the standard
of living of the country.

2.3.2. Prices Rise When the Government Prints Too Much Money

The real estate industry has seen prices increase through the decades. This has been caused by
the rise of demands and scarcity of apartments in prime locations as well as devaluation of
money and inflation. The value of apartments and lands have increased substantially due to
these reasons.
But there were no alarming situations in Bangladesh’s recent history which drastically
increased the prices in one or two months like that which happened in Germany in the 1920s.

2.3.3. Society Faces a Short-Run Trade-off between Inflation and Unemployment

The short run effects of monetary injections in the real estate industry are as follows:
 The high amount of money increases the purchasing power of the consumers. So, the
demand for flats and apartments rise.
 The higher demand makes the real estate developers increase their prices.
 They are also influenced to hire more workers and they start building more projects.
 As they hire more people, the unemployment of the country declines.
 This in turn increases the purchasing power of consumers again.
 The cycle repeats.
In this way, over a short period of time inflation and unemployment go in opposite directions.
The government actively tries to control these trends, but many suggest that it should be left
for the market and the economy to decide for themselves.

3. Conclusion

The above discussion was aimed at aligning the activities of the real estate industry with the
ten principles of economics. The real estate industry has been thriving at recent times in our
country and is one of the fastest growing industries. We can see all the ten principles of
economics in action here. We have tried to relate how these firms or their consumers take
TEN PRINCIPLES OF ECONOMICS IN THE REAL ESTATE INDUSTRY 9

decisions, interact with each other and how the economy for the concerned industry works
out as a whole in our discussion. Starting from investing in a real estate business to
employing people for it and acquiring lands for expansion into the concerned industry or
entering a new industry, all these activities can be linked to these ten basic principles. Real
estate business is one of the main reasons behind the economic growth and industrialization
in our country. So it is necessary to know how the concepts of economics apply to this
industry and how can these be utilized to gain optimum results. Otherwise we will not be able
to get the desired outputs from the real estate industry. So it is very important to have the
basic knowledge about these principles in order to operate efficiently and effectively in this
competitive industry. Hence the study of economics for operating in real time is very
important for any firm or producer.
TEN PRINCIPLES OF ECONOMICS IN THE REAL ESTATE INDUSTRY 10

4. References

1. Mankiw, N. G. (2016). Principles of microeconomics. Cengage Learning.

2. Salvatore, D., & Salvatore, D. (2011). Microeconomics. McGraw Hill.
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4. digita (www.digitainteractivecom). (n.d.). Concordgroupnet. Retrieved 13 November,
2017, from
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5. Sheltech (pvt) limited. (n.d.). Sheltech-bdcom. Retrieved 13 November, 2017, from
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