The economics of skyscrapers
While there are many economies of scale, large size construction is also a disadvantage in some respects. As the output increases, the tertiary problems of distribution and marketing increase. Relations between management and employees become increasingly impersonal, with a long chain of command which discourages enthusiasm. It becomes increasingly difficult to achieve a consensus of opinion, so decision-making is deferred; and when decisions are made they lose effectiveness in the more remote parts of the organization. As buildings grow taller, they also demand stronger foundations and bracing, larger mechanical systems, and – of primary importance in the days of super tall buildings – more elevators. Quite apart from the costs associated with all of this extra construction, each additional bank of elevators reduces the floor area available for rent or sale – thus pushing down the revenue potential for the building and experiencing the law of diminishing returns.The law of diminishing returns refers to the fact that as extra units of one factor of production are employed, with others held constant, the output generated by each additional unit will eventually fall.
Price discrimination
In perfect competition there is only one market and only one market price for each product. Consumers do not have perfect knowledge of the market and those prepared to pay more can be charged more. If an item costs £1 in a competitive market and some buyers purchasing at this price, would have been prepared to pay more – say £1.50 or £2.00 or even £10.00 – then they are said to enjoy a consumer surplus of satisfaction. Clearly a consumer surplus represents a loss to the suppliers. If they could strike a bargain with every customer, and get that customer to pay what the commodity is worth to him, instead of the market
Figure 1 - Consumer Surplus
price, they would improve their profits. This can be done when it is possible to sell to different customers at different prices; this is price discrimination.
This principle exists in skyscrapers as different customers are asked a different price as dependent by the height and floor use e.g. office, commercial or residential. The firms responsible for selling the units could price discriminate easily because of the conditions fulfilled: Monopolists as the only supplier of land use for the specific location, the developers are given the ability to be price makers. However, if it is located in concentrated skyscraper areas such as in China and New York, it is more difficult to price discriminate. ‘Markets’ are separated to prevent buyers from buying cheaply from one particular market then reselling it at a higher price. This can be achieved by requiring customers supplied at the cheaper price to enter into an agreement not to resell to anyone at less than a specified price included in the buying contract. The elasticity of demand in the two markets must be different. There will be no point in offering two different prices if the elasticity of demand of the two groups of customers is the same. It is the refusal of the favoured customer to buy unless terms are made favourable to him that makes the monopolist offer the cheaper rate. In other words, the favoured customer has a more elastic demand than the unfavoured customer. For example if the demand for business use is more elastic than for
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