Transcript Urban Economics

Urban Economics
Economics 153
Pomona College
www.economics.pomona.edu/lozano
Individual Activity (5 minutes)
• Think of one city, any city:
• What are the costs associated with living in that
city?
• What are the benefits associated with living in
that city?
• Write your answers.
Activity by Pairs (5 minutes):
• Discuss the benefits and costs of living in one
city with another member of the class.
• What are the similarities, and what are the
differences.
Punch line:
• Cities will exist as long as the benefits associated
with living in cities are greater than the costs.
What is Urban Economics?
• Definition: Urban Economics is the study of the
location choices of firms and households, and
the consequences of these choices.
• Urban economics examines the question of where
of economic activity:
1) Households choose where to work
2) Households choose where to live
3) Firms choose where to locate its
factory, office or store.
Why are cities interesting to Economists:
• Creation and Innovation: People share ideas and develop new
products and production techniques.
• Learning in Cities: Contacts in a city facilitate the exchange of
knowledge.
• Trade and Production in Cities(1): Cities provide economies of
scale that make the production of goods and services more
efficient.
• Trade and Production in Cities(2): Cities are a gathering place for
buyers and sellers: they facilitate trade.
• Consumption in Cities: Since there are more consumers in cities,
there will be demand for many goods and services.
What are Economies of Scale?
• When a firm or industry’s average cost decreases
when quantity produced increases.
• Marginal Cost is lower than average cost.
• Cities exist because it is efficient to produce
some goods in large scale.
• Economies of Scale arise because of:
1. Factor Specialization
2. Indivisible Inputs are shared
Definition of a City:
• An area with relatively high population density
that contains a set of closely related activities
A 2X2 Model of a City Economy
•
•
•
•
Outputs: Shirts and Bread
Inputs: Land and Time
Travel technology 8 mph
3 “City-Less” assumptions:
A1) Equal Productivity in Production.
A2) Constant Returns to Scale in Production.
A3) No Scale Economies in Transportation.
• A1-A3 uniform price of land and uniform population
density.
• If people gather around one area, price of land will go
up, no gains from this.
Relax Equal Productivity Assumption (1)
• Gains from trade due to differences in productivity.
Output per Hour
Opportunity Costs
South
North
South
North
Bread
1
2
1 shirt
3 shirts
Shirt
1
6
1 loaf
1/3 loaf
Relax Equal Productivity Assumption (2)
• Exchange at a rate of 2 shirts for one loaf
North
South
Bread
Shirts
Bread
Shirts
∆ Prod
-2
+6
+3
-3
Exchange
+3
-6
-3
+6
Gain
+1
0
0
+3
Relax Equal Productivity Assumption (3)
• Both people in the north and in the south are
better off.
• Still no cities, each southern household trades
with a northern household.
Trading Cities
Relax Economies of Scale in Transportation Assumption
• Transportation cost per unit decreases.
• Efficient to have middlemen to collect, transport and
distribute the bread and shirts.
• Trading firm will locate in a place convenient to
distribution: crossroads, port or river.
• Firm employees will want to live close to the firm.
• Price of land will go up, land plots will be smaller, and
city population density will increase.
Factory Cities
Relax Constant Returns to Scale Assumption (1)
• Scale Economies because of factor specialization and
indivisible input sharing.
• Worker is willing to work in as long as the worker gets
paid more in the factory than what she can make by
herself.
• A consumer will buy from the factory as long as the
price paid to the factory plus the cost of commuting is
less than what she could do at home.
• Workers want to live close to the factory, bid the price
of land up, land plots become smaller and population
density increases.
Factory Cities
Relax Constant Returns to Scale Assumption (2)
• A worker from the south produces 1 loaf or 1
shirt by herself. She produces 4 shirts in the
factory and gets paid 1 loaf of bread (shirt cost is
¼ loaf).
• The factory cost of the shirt is ¼ loaf.
Commuting takes 8 miles an hour. The
consumer can produce 1 loaf in an hour
(commuting cost per mile is 1/8 loaf).
Fig 2-2
The size of the city
• Transportation speed: as traveling becomes
faster the size of the city increases.
• Technology: Lower costs from economies of
scale increase the size of the city.
• Wages: As commuting times increase, the
worker must be compensated for that time, and
the factory costs increase.
What is Next: Transportation Costs, learning in
cities and Industry Agglomeration
• Krugman (JEP, 2002)
Quigley (1998) Diversity and Cities (Scale Economies)