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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.