114 terms

Urban Economics


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The discipline of urban economics is defined by
the intersection of geography and economics
Households make choices to maximize their______, while firms maximize their______
Utility, Profit
Urban Economics can be divided into 6 related areas
1)Market force in the development of cities
2)Land Use Within Cities
3)Urban Transportation
4)Crime and Public Policy
5)Housing and Public Policy
6)Local Government expenditures and taxes
an urban area has a population density that is high relative to
the density of the surrounding area
Urban Area
densely settles geographical area with a min pop of 2500 ppl and a min density of 500 ppl per sqr mile
metropolitan area
core area with substantial pop nucleus with adjacent communities that are integrated
min pop of metro area
micropolitan area
smaller version of metropolitan area with a concentration of 10,000 - 50,000
Principal City
largest municipality in each metropolitan or micropolitan statistical area
3 conditions that must be satisfied for a city to develop
1)Agricultural Surplus
2)Urban Production
3)Transportation for Exchange
Agricultural Surplus
people outside cities must produce enough food to feed themselves and city dwellers
Urban Production
City dwellers must produce something to exchange for food grown by rural workers
Transportation of exchange
there must be efficient system to exchange goods for foods
transformation of rural society to urban society occurred bc
1) technology advances increased agric surplus
2)inc productivity by urban workers
3)inc efficiency of transportation and exchange
Btwn now and 2030, urbanization rates are expected to
increase everywhere, with the largest being in africa and asia
What are the 5 axioms that provide a foundation for the economic models of location choices
1) prices adjust to achieve locational equilibrium
2)self-reinforcing effects generate outcomes
3)externalities cause inefficiency
4)Production is subject to economies of scale
5)competition generates zero economic profit
1) Prices adjust to generate same utility level in
Local Equilibrium. Price of a house in hawaii on the beach is going to be a lot more expensive than a house in the slums of new york. gives somebody an incentive to move to hawaii which is more expensive or slums which is cheaper
3) an externality occurs when some of the costs or benefits of a transaction are
experienced by someone other than the buyer or seller
Ex: slowing your car down slows everyone else behind you
an improvement to one's yard would be an external benefit to neighbors by increasing value of their homes
What is his solution to all sorts of external costs and benefits?
to internalize the externality with a tax and let individuals who bear the full social cost and benefits of their actions decide what to do
economies of scale occur when
the average cost of production decreases as output increases
when the long-run average cost curve is negatively sloped,
there are economies of scale
4) economies of scale occur for 2 reason
1)indivisible inputs
2)factor specialization
Indivisible Inputs and factor specialization
output increases but cost of output decreases because input is spread farther as output increases and people can work in more specialized areas which allows them to become more efficient at what they do
2) Self-reinforcing effects generate outcomes
a few artists move into a city and make an artistic impression on city attracting more artists to the city. or how car dealerships help each other with customers by the use of comparisons
5)Competition generates zero economic profit
firms will continue to enter the market in the same location until economic profit becomes zero
once the economic profit of a location reaches zero
a firm will be making enough money to continue their business and there will be no incentive for new firms to enter market
economic profit
excess total revenue over total economic cost
economic cost includes
opportunity costs of all inputs
urban clusters
scaled down version of an urbanized area,
total population is btwn 2500-50000 people
urban population
all people living in urbanized areas and urban clusters
Ch 2
the following assumptions eliminate the possibility of cities
1)equal productivity
2)constant returns to scale in exchange
3)constant returns to scale in production
Equal Productivity
all land is equally productive in producing (wheat and wool) and all workers are equally productive (Bread and Shirts)
constant returns to scale in exchange
cost of executing one transaction, including transportation cost is constant, regardless of how much is exchanged
constant returns to scale in production
quantity of shirts produced per hour are constant regardless of how many shirts a worker produces
comparative advantage
leads to specialization and trade
transaction cost
opportunity cost of the time required to exchange products and is equal to amt of output that could be produced during that time
presence of specialization and trade will not necessarily cause
a city to develop
trading firms will emere if there are economies of scale that are
associated with exchange and trade
to fully exploit scale of economies, trading firms will
locate at places that they can efficiently collect and distribute large volumes of output (oil rigs, Ports)
why would property in the new orleans port be very expensive
a lot of business will be passing thru and companies need that port to get their products to their branches-$$$
*a transshipment point
an increase in the price of land will cause the people to
economize on land by occupying smaller residential lots
this result is a place with a relatively high population density AKA
a city
trading cities develop when
comparative advantage is combined with scales economies in transport and exchange
we assume that workers are perfectly mobile, therefore the utility level of a city worker must be
the same as the utility level for a rural worker
a factory must pay its workers enough to make them indifferent between
working in the factory town vs working in the rural area
workers settle travel cost by moving close to the factory which causes
competition for land which will bid up the price
on of the key innovations of the industrial revolution was eli whitney's system of
interchangeable parts for manufacturing
-became the standard system for mass production
mass production decreased the relative cost of factory goods causing
centralization of production and employment in large industrial cities
innovations in intercity transportation contributed to
industrialization and urbanization
innovations in intercity transportation decreased
the relative price of factory goods, which contributed to the growth of factory cities
innovations in agricultural productivity
freed people to work in urban factories and firms
innovations in transportation cut transport cost and allowed each farmer to
serve a wider market area
the development of electricity decreased importance of energy considerations in location decisions causing firms to
base their location choices on the accessibility to consumers and other inputs
if there are no restrictions on entry, firms will continue to enter the market until
profit is zero
each firm makes zero economic profit and workers are indifferent between
rural and city life
price of land adjusts to
fully compensate for differences in accessibility
factory city develops when there are
scale economies in production
industrial revolution caused massive urbanization because of its
innovations in aggricultural, transportation, and production
changes in energy technology altered the location decisions of firms with
water power factories along streams, steam power factories along rivers and railroads, and electricity making firms more footeloose
spatial competition among firms generates
a market area for each firm and a system of cities
Transfer-Oriented Firm
dominant location factor is the cost of transporting inputs and outputs
firm chooses location that
minimizes total transport cost
total transport costs
sum of procurement and distribution cost
procurement cost
cost of transporting raw materials from input source to production facility
distribution cost
cost of transporting firm's output from production facility to output market
classic model of a transfer-oriented firm has 4 assumptions that make transportation cost the DOMINANT location variable
1)single transferable output
2)single transferable input
3)fixed-factor proportions
4)fixed prices
single transferable output
firm produces fixed qty of single product, which is transported from production facility to output market
single transferable input
firm may use several inputs but only one input is transported from an input source to the firms production facility
fixed-factor proportions
firm produces fixed quantity with fixed amts of each input
fixed prices
firm is so small that it doesnt affect the prices of its inputs or its product
firms profit equals
total revenue minus input costs and transport cost
firms location choice is determined by the outcome of a tug of war
firm's pulled toward its input source bc the closer to source the lower its procurement cost is but also pulled toward market bc the proximity to the market reduces the firms distribution costs
Resource-Oriented Firm
firm that has high costs for transporting its input
weight-losing activity
output is lighter than input
ex:bats lighter than logs, lot of wood lost
some firms are resource-oriented bc their inputs are
relatively expensive to transport
its more expensive to transfer raw fruit (fridgerated truck) to a canning factory than it is to transport that output (canned fruit) to output market>>>thus, factories are closer to inputs
market-oriented firm
firm that has relatively high costs for transporting its output to the market
weight-gaining activity
outputs are heavier that its transferable input
monetary weight of the output exceeds the
monetary gain of the input
because the monetary weight of the output exceeds the monetary weight of the input, a one mile move away from the market will
increase the distribution cost by more than it decreases the procurement cost
some firms are market oriented bc their output is
expensive to tansport
output will be costly if it is
bulky, perishable, fragile, or hazardous
output of an automobile assembly firm is
more bulky than its inputs
the median location minimizes
total travel distance (same number on each side of firm)
transshipment point
point at which a good is transferred from one transport to another
agglomeration economies
economic forces that cause firms to locate close to one another in clusters
-production of engines, 4 cities have half of us employment in that industry
localization economies
forces acting on firms in a single industry together
urbanization economies
when agglomeration economies cross industry boundaries
this leads to the development of
large and diverse cities
Chapter 3
Some competing firms locate close to one another to
share a firm that supplies an intermediate product (buttons)
an intermediate input is something one firm produces that a second firm uses as
an input in its production process
clustering is beneficial because it allows firms to
take advantage of agglomeration economies from input sharing,
labor pooling,
skills matching
and knowledge spillovers
sharing a labor pool
cluster of firms that facilitate the transfer of workers from unsuccessful firms to successful ones
isolated firm
dont face any competition for labor within its own town
isolated firm hires same number of workers during high and low demand but
pays lower wage for lower demand
for every successful firm hiring workers, there is
an unsuccessful firm firing them
in cluster, the total demand for labor and equilibrium wage are
good news when demand is high
move to cluster cuts wage lower and firm hires more
bad news when demand is low
move to cluster inc wage generating lower profit
increase in the number of workers decreases
mismatches and training costs increasing the net wage
knowledge spillovers are important in determining
the locations of firms in idea-oriented industries
when searching for evidence of localization economics, researchers focus on effects of industry concentration on
worker productivity
number of new production plants
growth in industry employment
if there are localization economies, we expect industry clusters to
generate higher productivity, more births, and more rapid employment growth
large cities have become increasingly specialized in
managerial functions
while smaller cities have become more specialized in
most innovative industries are more likely to form
an increase in attractiveness of a big city decreases
the wage that workers are willing to accept to live and work in the city>lower production costs
firms may cluster to share a supplier of an intermediate input if
it is subject to large scale of economy and requires face time
firms may cluster to share a labor pool if
the variation in product demand is greater at the firm level than industry level
larger cities provide better skill matches leading to
higher productivity and wages
why are people and firms attracted to cities
bv they facilitate knowledge spillovers learning and social opportunities
agglomeration exonomies cause
self-reinforcing changes in location
the movement of one firm toa city increases incentive for
other firms to move to city