Saturday, April 2, 2011

Engineering meets Economics on the 50th Floor of a Skyscraper---A nice graphic on the Marginal Costs of Tall Buildings...

Skycraper construction is reaching new heights, literally and figuratively. This is the last graphic from an interactive that shows a historical timeline in the engineering of these types of structures.  I like the link that is made between  engineering and economics. 

When construction of a skyscraper takes place there are lots of up-front costs, both fixed and variable. As construction is set-up and commences, then costs decrease per floor added because fixed costs become spread out over the project and variable costs, while they may be increasing, are increasing at a decreasing rate (production becomes streamlined and efficient). 

However, as the graphic shows, the variable costs will start to increase again as the engineering requirements of maintaining a strong structure become more complicated and expensive.  After a certain point, the cost of each additional floor becomes more costly than the last.  In economics, we call this the Marginal Cost of Production--the change in Total Cost divided by the change in quantity, in this case each floor of the building.  If the Marginal Cost of the next floor EXCEEDS the Marginal Revenue (the change in Total Revenue divided by the change in quantity, in this case each floor) gained from leasing that floor then the builings owners should not construct that floor.

 Alas, this may not stop them from reaching new heights. Sometimes peoples egos will over-rule the economics. We know how that usually turns out....

Source: The Atlantic

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