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Economics of a Skyscraper: Understanding the Urban Landscape
Andrew Schauer
Background:
Cities are known for their iconic skylines defined by skyscrapers of all shapes and sizes. What
determines a city skyline? How is the shape and height of each building determined? According to
Professor Ed O'Donnell (College of the Holy Cross), building design is the result of economics,
building codes/laws, and architecture/engineering. In this lesson, students will use apply the
economic principles of externalities and marginal analysis to investigate the shape and size of
skyscrapers.
Purpose/Learning Targets:
Students understand that city skylines are influenced by economics, building codes, and design
considerations
Students apply the economic concept of externalities to understand the purpose of building codes
Students apply skills of marginal analysis to determine the most profitable height to build a
(simulated) skyscraper
Grade Level:
Grades 9-12 Economics Students
Standards:
Colorado Economics Standard 1, Evidence Outcome C: Understand that effective decision-making
requires comparing the additional (marginal) costs of alternatives with the additional (marginal)
benefits
Colorado Economics Standard 1, Evidence Outcome B: Explain how economic choices by
individuals, businesses, governments, and societies incur opportunity costs
Colorado History Standard 3, Evidence Outcome B: Investigate the historical development of and
impact of major scientific and technological innovations
Colorado Geography Standard 1, Evidence Outcome B: Create and interpret various graphs, tables,
charts, and thematic maps
Key Concepts Defined:
Externality – an effect felt beyond those whose decisions caused the effect
Fixed Cost – the cost of inputs that do not vary with the amount of output purchased
Variable Cost – the cost of inputs that do vary with the amount of output produced
Marginal Cost – the additional cost of doing something one more time
Marginal Benefit – the additional benefit of doing something one more time
Marginal Analysis – the decision whether or not to do something one more time (typically made
by comparing marginal costs and benefits of an action)
(Definitions from Economics in Action by Alan B. Krueger and David A. Anderson)
Lesson Sequence:
1. Introduction –
Distribute the student handout. Allow the students spend 30 quiet seconds observing the
image below and record\ what they see. Discuss student responses, ultimately getting to the
idea that urban landscapes are defined by buildings of various shapes and heights. Ask the
students why this is? What determines the shape and height of a building?
hdw.eweb4.com
2. Skyscraper Design/Creation –
On the student handout, have each student
design their own skyscraper to the best of
their artistic ability. The only limitation put on
student skyscraper design is it has to be
something that could reasonably stand
without falling over. At instructor discretion,
students can share their designs with the
class.
3. Picture Analysis, Building Codes, and Skyscraper Redesign –
Focus student attention on the pictures of the Equitable Building, built in 1915. Ask student
what they see? What is unique about this building? What problems could be caused by this
building?
Equitable Building in 1915
Equitable Building in 2014
tilesinnewyork.blogspot.com
Eventually bring students around to the idea that this skyscraper (only 36 floors) was taller than
surrounding buildings and seemed to utilize every square inch of its lot. Due to this design, the
Equitable building blocked sunlight and airflow to surrounding buildings. Additionally, this building
could create a safety hazard by obstructing firefighters’ ability to service surrounding buildings.
According to The Equitable Building and the Birth of NYC Zoning Law (March 15, 2013) by
ny.curbed.com Staff:
It was said that the Equitable blocked ventilation, dumped 13,000 users onto nearby sidewalks,
choked the local transit facilities, and created potential problems for firemen. The Equitable's noon
shadow, someone complained, enveloped six times its own area. Stretching almost a fifth of a mile, it
cut off direct sunlight from the Broadway fronts of buildings as tall as 21 stories. The darkened area
extended four blocks to the north. Most of the surrounding property owners claimed a loss of rental
income because so much light and air had been deflected by the massive new building, and they filed
for a reduction in the assessed valuations of their properties.
Blocked sunlight from the
Equitable Building
In economics terms, this is a highly efficient design but also an example of market failure. The
reason for this market failure has to do with externalities. Externalities are defined as effects felt
beyond those whose decisions caused the effects. In this case, the blocked sunlight, blocked airflow,
and increased safety risk incurred by surrounding areas is called a negative externality (since it
detracts from the value of surrounding areas).
Laws are often created to protect property rights from negative externalities. In this example, the
Equitable building served as the impetus for New York City’s first building code of 1916. This code
required building to preserve airflow and sunlight for surrounding areas by utilizing a “stepped” or
“setback” design. This explains the appearance of many skyscrapers that are reduced in size near
the top.
Require students to redraw their original skyscraper (there is space for this on the student worksheet)
to be in compliance with building codes and reduce the negative externalities this building creates for
surrounding areas. Any “stepped” or “tiered” design would be acceptable.
What evidence of building codes is evident in this picture?
hdw.eweb4.com
4. Marginal Analysis Height Simulation –
Tell students that the next determination is how tall to build their skyscrapers. Economics once again
factors into this decision. Skyscrapers are typically built to generate profit for their owners. The profit
maximizing height of a skyscraper is dependent upon a combination of fixed cost (the cost of the
land), variable cost (the cost for construction and maintenance of the building), and revenue (rent
received for each floor). With these calculations, a builder can determine how many floors to build.
Conduct the following simulation with the students:
You’ve purchased this plot of land for $10 million (fixed cost) and you intend to build a skyscraper on
your property.
Your investors want the building (and land) to pay for itself in 30 years. You must decide how many
floors to build (variable cost). The cost of building each floor is as follows:
Floors 1-20: $10 million each
Floors 61-80: $20 million each
Floors 21-40: $12 million each
Floors 81-100: $30 million each
Floors 41-60: $15 million each
Explain to students that the increasing cost of floors as the building gets higher is an example of the
Law of Increasing Opportunity Cost (the tendency for the opportunity cost of a good to rise as more of
the good is produced). In this case, the cost of the good (floor) rises because of the increased
bracing and safety costs as the building rises higher off the ground.
The 30 year projected rent is $15 million per floor.
Students have the option of building a skyscraper of 20, 40, 60, 80 or 100 floors. How tall should
their skyscrapers be to maximize profit?
Advanced students who have already learned this in economics should be able to construct a chart
similar to the one below. For less advanced students, have them refer to the copy of this chart in
their student handout and complete the missing boxes. Helpful hints are included for students just
learning these concepts.
Remind students that when creating economic models, they should assume ceteris parabus. This
means all other variables are held constant to focus on the relationship between number of floors and
profit.
Sample Marginal Cost, Total Revenue, and Profit Table:
Quantity
(Floors)
Fixed
Variable
Cost
Cost
(Land)
(Construction/
(Millions) Maintenance)
(Millions)
Total
Costs
(Millions)
Marginal
Cost
(Per Floor)
(Millions)
Revenue
Per Floor
(Rent)
(Millions)
20
$10
$15
40
$10
$15
60
$10
$15
80
$10
$15
100
$10
$15
Total
Revenue
(Millions)
Profit
(Millions)
Sample Completed Table:
Quantity
(Floors)
Fixed
Variable
Cost
Cost
(Land)
(Construction/
(Millions) Maintenance)
(Millions)
Total
Costs
(Millions)
Marginal
Cost
(Per Floor)
(Millions)
Revenue
Per Floor
(Rent)
(Millions)
Total
Revenue
(Millions)
Profit
(Millions)
20
$10
$200
$210
10.5
$15
$300
$90
40
$10
$440
$450
11.25
$15
$600
$160
60
$10
$740
$750
12.5
$15
$900
$150
80
$10
$1140
$1150
14.375
$15
$1200
$50
100
$10
$1740
$1750
17.5
$15
$1500
- $250
After the students have had sufficient time to make calculations and complete their chart, ask
students to use this chart to answer the following questions.
What is the most profitable height for your building? Why?
At what height does the building start making a profit? Why?
At what height does the building start losing money? Describe two ways of determining this point…
Explain to the students that answering these questions is an example of the economic term: Marginal
Analysis - the decision whether or not to do something one more time (typically made by comparing
marginal costs and benefits of an action). In this case, economists are comparing the marginal costs
and benefits of building each additional floor (or set of 20 floors in the simulation).
5. Changing Markets/Real World Economics –
Sometimes economics cannot predict exact behaviors. Also, markets are constantly changing so an economic
model based on specific market conditions is subject to change as that market changes. Here are three
examples of this in urban building design:
Example #1: The Met Life Building
The Met Life Building next to Madison Square was planned to be approximately 100 stories (see image on the
left). With the changing market after the 1929 Stock Market Crash, however, only the base of the building was
constructed. The building stands today as a 30-story base for 70 additional stories that were never built.
www.nyc-architecture.com (all three images)
According to nyc-architecture.com: In 1929, the Metropolitan Life Bldg, comprising the 1893 12-story
construction, the 1909 campanile-like tower and the 1919 north annex, was becoming too small to
house the continual growing activities of the biggest insurance company. A new building was
considered for the full block site between E24th and E25th Streets, designed by Corbett and Waid...
which missed to be the highest in the world. The proposed 100-story telescoping tower would have
reached a climax in the mountain-like style, with fluted walls, rounded façades, like a compromise
between the Irving Trust Bldg and the visionary Hugh Ferriss's drawings. But the 1929 crisis exploded
and... was erected only what was previously considered as the base.
Example #2: The Woolworth Building
The Woolworth Building was built in 1913 as a 57 story building even though based on the economics
of the time; the predicted economic height should have been 37 stories (Jason Barr, The History &
Economics of Skyscrapers in Manhattan, andromeda.rutgers.edu). F.W. Woolworth stated in the
New York Times in 1910, “I do not want a mere building, I want something that will be an ornament to
the city.” According to Professor Ed O'Donnell (College of the Holy Cross), skyscrapers could also
serve as a marketing tool for the namesake company.
F.W. Woolworth: “I do not want
a mere building, I want
something that will be an
ornament to the city''
(NY Times, 1910).
http://www.cassgilbertsociety.org/works/nyc-woolworth-bldg
Example #3: Coors Field
Coors Field was designed to be a 43,000 seat baseball stadium. Playing the 1993 and 1994 seasons
in a different stadium and drawing higher than anticipated rates of attendance, the builder modified
the design to accommodate a changing market. The stadium was constructed to as a 50,000 seat
venue. The market, however, changed again and the team had trouble filling all of the seats in such
a large stadium. To accommodate this most recent market change, the team removed seats from the
right field upper deck in 2014 to create a party zone called “The Rooftop.”
http://www.tickpick.com
“The Rooftop” at Coors Field after
the removal of upper right field seats
(Opened for the 2014 baseball
season). Image from
blogs.gazette.com
According to ballparksofbaseball.com: Named the Colorado Rockies, the team played at Mile High
Stadium during the 1993 and 1994 seasons while their new ballpark, Coors Field was constructed in
downtown Denver. Original plans called for the ballpark to have a seating capacity of 43,000.
However after the team attracted three million fans during their first season they announced in
November 1993 that they would enlarge Coors Field to seat 50,000 fans.
6. Assessment –
Instructors can assess student learning on this topic using two means: 1. Collection and grading
of the student worksheet, and/or 2. A simple ticket out of the door. On this ticket-out-of-the-door,
students would construct a written paragraph answering the following question: What role does
economics play in the design and construction of skyscrapers?
hdw.eweb4.com
(Student Worksheet on next page)
Name________________________________________________Score_________/20
Economics of a Skyscraper: Understanding the Urban Landscape
Describe what you see in the projected image…
Original Skyscraper Design
Original Design Modified for Building Codes
Economics/Height/Marginal Analysis:
The land for the building already cost you $10 million and your investors want the building to pay for
itself in 30 years. The cost of building each floor is as follows:
Floors 1-20 $10 million each
Floors 41-60 $15 million each
Floors 21-40 $12 million each
Floors 81-100 $30 million each
Floors 61-80 $20 million each
The 30 year projected rent is $15 million per floor.
You have the option of building a skyscraper of 20, 40, 60, 80 or 100 floors. How tall should your
skyscraper be to be paid off in 30 years and maximize profit?
Hints: Total cost = Fixed Cost plus Variable Cost
Marginal Cost = Total Cost divided by Quantity
Total Revenue = Quantity multiplied by Revenue
Profit = Total Revenue minus Total Costs
This simulation is ceteris parabus meaning that all other variables are held constant.
The cost of floors changes from 1-20, 21-40, etc. due to the law of increasing opportunity
costs (in this case also due to the increased bracing and security measures required for a
higher building).
Quantity
(Floors)
Fixed
Variable
Cost
Cost
(Land)
(Construction/
(Millions) Maintenance)
(Millions)
Total
Costs
(Millions)
Marginal
Cost
(Per Floor)
(Millions)
Revenue
Per Floor
(Rent)
(Millions)
20
$10
$15
40
$10
$15
60
$10
$15
80
$10
$15
100
$10
$15
Total
Revenue
(Millions)
Profit
(Millions)
Evaluation Questions (Use your completed chart to answer these questions):
What is the most profitable height for your building? Why?
At what height does the building start making a profit? Why?
At what height does the building start losing money? Describe two ways of determining this point…
Lesson Evaluation Question (Use all concepts from the lesson to answer this question):
What role does economics play in the design and construction of skyscrapers? Answer in one written
paragraph to serve as a ticket out of the door.