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URBAN ECONOMICS
SPRING 2008
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Why do cities exist?
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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?
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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.
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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.
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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:
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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.
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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?
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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.
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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
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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?
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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
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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.
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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.
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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).
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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.
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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).
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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.
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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
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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.
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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.htm7/28/2019 wk6-land
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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.
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What can be done?
Metro, easier transportation methods, etc.