BIG and SMALL CITIESBIG and SMALL CITIES

Chapter 3

Cities Cities

Trading Cities because some activities are subject to economies of scale in transportation.

Factory Cities develop as a result of scale economies in production

The scale economies are internal to the firm.

External Economies of ScaleExternal Economies of Scale

The benefits come from the decision made by other firms.

Increase labor productivity.The Firms allow tp pay higher wagesCommuting cost are relatively high

Localization Economies and Localization Economies and Industry ClustersIndustry ClustersSharing input supplierSharing a pool of laborSharing information

Sharing Input SupplierSharing Input Supplier

The input demand of an individual firm is not large enough to exploit the scale economies in the production of intermediate input

Transport costs are relatively high

Sharing a Labor PoolSharing a Labor Pool How many workers will we hire ? What sort of labor skills will we need in our

workers? A Cluster Firms facilitates the transfer of worker

for two reasons : 1. Workers have relatively low job search cost

because : - Information about job openings is spread through informal channels – Prospective employers are nearby, making formal job searches relatively easy.

2. Because of the proximity of employers, moving costs are relatively low.

Benefits and Costs Labor Benefits and Costs Labor PoolingPooling

An isolated firm pays different wages in good times and bad time, but hires the same number of workers in both cases.

A Firm in an industry cluster pays the same wage in both cases, but hires more workers in good times. The benefits of clustering and labor pooling is that during good times the firm pays a lower wage and hire more workers

Differences in City SizeDifferences in City Size

The Roles of localization economiesUrbanization economiesLocally consumed products

Localization EconomiesLocalization Economies

Industries vary in the strength of their localization of economies.

Some Industries experience substantial cost saving from input sharing, labor pooling, and information spillovers.

The others experiences relatively small cost saving.

The variation in the strength of localization economies acroos industries is one factor in generating cities of different sizes.

Urbanization EconomiesUrbanization Economies

Industries subject to strong localization economies from large clusters, causing large concentrations of jobs, Industries subject toe weaker localization economies form small clusters and employment concentration. Urbanization economies amplify differences in employment because large cities provide greater urbanization economies. Local employment amplifies differences in city size because in city size became larger cities have a wider variety of consumer goods.

The Role of Consumer GoodsThe Role of Consumer Goods

Workers in a city spend some of their income on consumer products provided within the city.

Workers buy food, get haircuts, rent housing, use medical services and go to sporting events.

Agglomerative Economies in Agglomerative Economies in Marketing : Shopping ExternalitiesMarketing : Shopping Externalities

Imperfect SubstitutesComplementary GoodsRetail Clusters

Innovation in Telecommucation Innovation in Telecommucation and the Future of Citiesand the Future of Cities..

In a given relationship, some face-to-face encounters will replace by telecommunication enconters will be replaced byb telecommunication.

Easier communication may increase the number of relationship.

1. Localization economies occur because firms in an industry cluster benefit from sharing :a. The suppliers of intermediate inputs b. A labor pool and C. Information

2. Urbanization economies occur if the production cost of a particular firm decreases as the total output of the urban area increases

3. The incubation process results from localization and urbanization economies.

SummarySummary

4. Differences in city size caused in part differences in localization economies across industries. Any underlying differences city size are amplified by urbanization economies and the provision of local goods and services.

5. Innovation in telecommunication technology will not cause cities to disappear because some activities require face time, so there will always be a need for cities and the physical proximity they provide.

6. A shopping externality occurs if the sales of a particular store increase as other retailers move close r to the store. These agglomerative economies in marketing cause the clustering of retailers. Comparison shopping causes the clustering of firms selling imperfect substitutes. One-stop shopping causes the clustering of firms selling complementary goods