7/28/2019 wk6-land

1/24

URBAN ECONOMICS

SPRING 2008

7/28/2019 wk6-land

2/24

Why do cities exist?

7/28/2019 wk6-land

3/24

Cities are places in which population density is

greater than the other parts of the countries.

In an economic context, what are the factors

behind the creation of the cities?

7/28/2019 wk6-land

4/24

Lets build up a model

Assumptions:1. The region produces and consumes two

goods: shirts and bread.

2. People use land to grow raw materials andtake time to transform raw materials intoshirt and bread.

3. Travel within this region is by foot. Residentswalk at a speed of8 miles per hour.

7/28/2019 wk6-land

5/24

Suppose that:

1. All residents are equally productive at producing

bread and shirts. Similarly all land is equally

productive in production of raw materials.

This assumption implies that there is no room

for comparative advantage. Since all residents

are equally productive at producing bread andshirts, there is no advantage of trading.

7/28/2019 wk6-land

6/24

If we relax this assumption, i.e. one part of the

region may have a comparative advantage in

shirt production and the other part may have

a comparative advantage in bread production.

Lets say that the region has two parts: South

and North. The production amounts in each

region are given below:

7/28/2019 wk6-land

7/24

Output per hr (of a worker) Opportunity Cost

South North South North

Bread 1 2 1 shirt 3 shirts

Shirts 1 6 1 bread 1/3 bread

South has a comparative advantage in production of bread.

North has a comparative advantage in production of shirts.

7/28/2019 wk6-land

8/24

2. Suppose that there are no scale economies in

transportation. Transport cost per unit ofshipped per mile is independent of the

volume shipped.

But, if transport cost per mile decreases asthe volume transported increases, it would

be cheaper to transport shirts and bread in

bulks. This also creates intermediaries in

transportation.

What are the implications?

7/28/2019 wk6-land

9/24

The trading firms will locate at places convenient for the collection anddistribution of goods. Hence, marketplaces develop at crossroads, portsand other shipment points.

The location decisions of the trading firms cause the development ofcities. The marketplace will create employment opportunities.

The employees will live near marketplace to economize on commutingcosts.

Hence, demand for land near marketplace increases: Price of landincreases.

Residents will economize by occupying smaller lots.

As a result, population density around the marketplace will be higher thanthe rest of the region.

7/28/2019 wk6-land

10/24

Marketplace will create new employment opportunities

Employees will live near marketplace toeconomize on commuting costs

Population density around marketplace willbe higher than in the rest of the region

Scale economies in transportation

Firms prefer transportation in bulksMarketplaces develop at crossroads, ports,

other shipment points.

Comparative Advantage

Trading cities

7/28/2019 wk6-land

11/24

3. Suppose that production is subject to

constant returns to scale. This means, eachworker can produce either 1 shirt or 1 breadper hour regardless of how much he/sheproduces: There are no advantages from

producing at large scales.

If we relax this assumption, and impose

assumption of scale economies, then factoryproduction may replace home production.How?

7/28/2019 wk6-land

12/24

If there are scale economies (instead of CRTS)

in production, as volume of shirt productionincreases, labor required to produce one shirt

decreases (less input per unit of output, costs

decline with output).Labor

time/shirt

Number of shirts

Average labor time

7/28/2019 wk6-land

13/24

Why does the average labor time decrease as

number of shirts produced increases?

1. Factor speacialization: Each laborer

specializes in one task and their productivity

increases.

2. Indivisible inputs: Some inputs are indivisible

since they have minimum efficient scale. E.g.

Machines in a factory. As output increasesfactory uses more indivisible inputs hence

productivity increases.

7/28/2019 wk6-land

14/24

If the shirt factory produces 400 units with 100workers and 4 shirts per worker per hour:

What should be the wage level and price of a shirt?

Wage should be at least as high as to make workers

indifferent between working in the factory andworking at home.

If the worker works at home: He/she produces 1loaf of bread/hr.

If the worker works at the factory: He/she produces4 shirts/hr.

Hence, minimum wage should be 1 loaf of bread/hr.

7/28/2019 wk6-land

15/24

Since each worker produces 4 shirts/hr,

assuming that there are no other costs,production cost of one shirt is 0.25 loaf ofbread.

Net price of a factory shirt:

Price paid by consumer to firm (0.25 loaf)

+

Consumers opportunity cost of the time spenttraveling to and from the factory

(Loss of bread production due to traveling instead of

producing bread).

7/28/2019 wk6-land

16/24

A resident can produce 1 loaf per hr. It will be

sensible to buy a factory shirt if net price of afactory shirt is at most 1 loaf.

Since, production cost is equal to 0.25 loaf, the

consumer should consider the time that a triptakes.

0.25 + trip time= 1

Then trip time can be at most 0.75 hr.If it is less than 0.75, the consumer will prefer a

factory shirt.

7/28/2019 wk6-land

17/24

Suppose that walking time is 8 miles per hour.

According to these criteria, the market area of theshirt factory is determined.

It is the area for within which the factory willunderprice homemade shirts for residents.

In our case, it is defined as the area within 3 milesof the factory.

Why? (We can have at most 0.75 hrs walking time,this means since walking time is 8 miles/hr, wecan have 6 miles for two way walkingto andfrom the factory-. That is why we end up with acircle with a radius of 3 miles).

7/28/2019 wk6-land

18/24

7/28/2019 wk6-land

19/24

Are there any limits to city size?

1. Freight cost: We have assumed that consumers travelbetween home and factory meaning they they themselvesincur freight costs. This cost of transporting goods limitsthe ability of the factory to exploit economies of scale inproduction.

What can the factory do?

We know that travel speed is 8 miles/hr. and market areais a circle with a radius of 3 miles.

If the firm becomes responsible from freight costs andcreates a method to increase the travel speed, then it cancreate a greater market area.

E.g. If the firm increases the travel speed to 16 miles per hr(doubles), market area will be a circle with a radius of 6miles. This will increase the output of the factory,factorys workforce and population of the factory city.

7/28/2019 wk6-land

20/24

Decrease in freight cost allows factory to more

fully exploit economies of scale, increasing citysize.

Transportation is a very important factor

affecting the city size.

Think about examples from Turkey, Europe

7/28/2019 wk6-land

21/24

2. Scale economies: As economies of scale

beacome more powerful, cost of factoryproduction decreases relative to home

production.

Hence, market area of the factory increasesand size of factory cities increase.

Think about the industrial revolution:

Spinning jenny to the machines.

7/28/2019 wk6-land

22/24

Several inventions in textile machinery occurred in a relatively short time

period during the industrial revolution: the flying shuttle, spinning jenny,

spinning frame, and cotton gin. These inventions facilitated the handling of

large quantities of harvested cotton. In 1764, a British carpenter and

weaver named James Hargreaves invented an improved spinning jenny, ahand-powered multiple spinning machine that was the first machine to

improve upon the spinning wheel.

http://inventors.about.com/library/inventors/blflyingshuttle.htmhttp://inventors.about.com/library/inventors/blspinningframe.htmhttp://inventors.about.com/library/inventors/blcotton_gin.htmhttp://inventors.about.com/library/inventors/blspinningwheel.htmhttp://inventors.about.com/library/inventors/blspinningwheel.htmhttp://inventors.about.com/library/inventors/blcotton_gin.htmhttp://inventors.about.com/library/inventors/blspinningframe.htmhttp://inventors.about.com/library/inventors/blflyingshuttle.htm

7/28/2019 wk6-land

23/24

3. Commuting costs: Larger cities have larges

commuting times.

In larger cities factory must pay workers to

compansate for longer commuting times.

But as wages increase, cost of factory shirts

increase relative to homemade shirts.

Since market area is determined according to the net price of the factory

shirts, increase in wages is a limit to the city size.

7/28/2019 wk6-land

24/24

What can be done?

Metro, easier transportation methods, etc.