C o urs e 2

1. Course 2 Regional economics and development policies Nature and scope of regional economics Spatial economics and location

2. Subjects to be discussed • Spatial economics – regional economics • Market location and consumer behavior • Systems of cities • Industrial location

3. Spatial economics Everything is somewhere, and WHERE it is matters Causes and effects

4. Spatial economics • Causes and effects • Understanding these economic factors – important practical use: • personal lives • business • establishment of public policies

5. Regional economics Regional economics represents a framework within which the spatial character of economic systems may be analysed and understood

6. Scope of regional economics • to determine where different types of economic activity will prosper • combines tools from microeconomics, macroeconomics, and international economics to analyze location patterns and other components of regional growth rates

7. Regional and „spatial” economics WHAT is WHERE, and WHY—and SO WHAT?

8. WHAT? • refers to every type of economic activity: • production establishments • other kinds of businesses, • households, • private and public institutions

9. WHERE? refers to location in relation to other economic activity; it involves questions of: proximity, concentration, dispersion, similarity or disparity of spatial patterns, can be discussed: in broad terms, such as among regions, or microgeographically, in terms of zones, neighborhoods, and sites.

10. WHY? and SO WHAT? refer to interpretations within the somewhat elastic limits of the economist's: competence daring.

11. Regional economics – young branch of economics • Traditional economists ignored the wherequestion altogether, without giving any spatial dimension to their analysis • Traditional geographers, though directly concerned with what is where, lacked any real technique of explanation in terms of human behavior and institutions to supply the why, and resorted to mere description and mapping. • Traditional city planners, remained preoccupied with the physical and aesthetic aspects of idealized urban layouts.

13. Economists and space • Classical economists – Adam Smith • “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest” • Neoclassical economists – Alfred Marshall • The working of the market…”depends chiefly on variations in the area of space, and the period of time over which the market in question extends; the influence of time being more fundamental than that of space” • Regional science – Walter Isard • opposed the „anglo-saxon bias” to repudiate the factor of space, to compress everything within the economy to a point, so that all spatial resistance disappears, maintaining this confines economic theory to „a wonderland of no spatial dimensions” • New economic geography – Paul Krugman • Economic geography or geographical economics? • Interaction between centripetal and centrifugal forces: • increasing returns, transport costs, expenditure patterns, • Immobile production factors, land rents, congestion

14. Walter Isard • since the 1940s played a key role in enlisting support from various disciplines to create this new focus. • his paper „Location and Space-Economy” (1957) became the basis of a new field called „regional science”, • the purpose to initiate a general location and spatial economy theory, • takes into consideration the whole spatial system of economic activities • the geographical distribution of inputs and outputs (resources and final products) • the geographical variations in prices and costs.

15. Three foundation stones • Natural-resource advantages, • Economies of concentration • Costs of transport and communication • Imperfect factor mobility, • Imperfect divisibility • Imperfect mobility of goods and services.

16. Market areas

17. Market areas and firm location analysis What factors does a firm consider when it decides where to locate? • maximize the return on their investments • maximize profits or just minimize costs • proximity to specific inputs or customers • amenities offered • transportation costs for inputs (input-oriented firms) and outputs (market-oriented firms)

18. Models of firm location behaviour • “shopping model” • study the competitive behavior among firms that sell consumer goods; • assume that the costs of labor and other inputs are the same everywhere; • the only factors that changes with the location are the number of consumers that the firm can attract and the number of rival firms • “shipping model” • describe competition among producers; • production costs are not equal everywhere • take into consideration the costs of inputs and transport costs

19. Market areas • Spatial monopolist –> duopoly –> oligopoly • pricing strategies • game theory • Commuter shopping behavior • Single product -> multi-purpose -> multi-stop shopping behavior

20. Market area and full price (delivered price) • Market area is determined by the distance consumers are prepared and can travel to buy a product Full price equals: • the store price (mill price – gate price for agricultural products) • Transportation costs that are incurred in traveling to the store: • cost of gas, oil, insurance, depreciation for an automobile, or the cost of bus, taxi, or subway fares • opportunity cost of the time involved in traveling to and from the store. Home delivery or online shopping – shipping charges.

21. Linear market areas • Combining the demand function with the distance between the customer’s house and the store –> the limit price and the distance –> market area for a certain product and store • The simplest models in spatial economics require the following assumptions: • Store price and transport costs are constant • Transportation costs per unit of distance are constant (price-distance function) • Each consumer only buys one product, and have no other reason to go to the store and no other errands to do along the way

22. Dynamics of market areas Market area (its radius) varies when changes appear: • Selling/mill price in the store • if the mill price decreases, the market area increases and vice versa (the price-distance function will shift upward or downward, parallel to the original function) • Transport cost for the consumer • road construction, higher gasoline prices or more traffic congestion lead to increased transportation costs per unit of distance and, thus, shrinks the radius of the market area. • if one constructs a more efficient road, that cuts down the time needed to drive to the store, the market area radius expands • Demand for the firm’s product • If the demand for the product increases, the limit price increases and thus the market area increases

23. Price elasticity of demand and distance Price elasticity of demand for a product increases with distance to the store • Consumers who live farther from the store are more sensitive to price changes. They have more elastic demand curves than those living closer to the store. • Local customers have inelastic demand

24. Firm’s concentration or dispersion – Hotelling’s model Hotelling’s model shows why some firms group together and other firms disperse. • firms with perfectly inelastic demand for their product aggregate in the middle of the market area • firms with elastic demand tend to disperse D’Asperson, Gabszewicz and Thisse introduced game theory into Hotelling’s model • if firms cluster they tend to undercut one another’s price and thus expand their markets. Prices fall to or even below marginal cost. Firms tend to cluster if they sell heterogeneous products (shoes, second-hand cars, antiques) and to disperse if they sell homogeneous products (gas, cinema, supermarkets)

25. Consumer search behaviour and firm location • Commuter shoping behaviour • Multi-purpose shopping behaviour • Multi-stop shopping behaviour

26. Market areas and systems of cities

27. Central space theory • Assumption: homogenousplain; equali fertile andevenlydistributedresources => self-sufficientfarms are spreadevenlyabouttheplain • the original market, circle, of the monopolist, becomes at theend (oligopoly) an hexagon Whyhexagons? In long-runequilibrium, market areaconfiguration must havethreecharacteristics: • Therecannotbegaps in economic space (potentialcustomersthat are notserved). • Market area of the same level goodcannotoverlap; • Market areashavetoequal thethresholdsize market for thefirm

28. Central places and systems of cities • With specialization in producing even just one good, a farmer/entrepreneur attracts other artisans and manufactures, and eventually small cities appear. • Production costs drop even more as agglomeration economies take hold. • A homogeneous plain dotted with self-sufficient farmsteads evolves into a landscape with a logical and predictable system of cities of various sizes. • Christaller generates a hierarchy from the functions provided by the cities. • Goods with sufficient demand within relatively small market areas are level one goods and are provided at every center. • Other slightly more specialized goods are provided only at higher centers • Some goods are so specialized that only one center in the country (or the world) provides them. These are the highest level goods.

29. Location theories

30. Industrial location

31. “shipping models” • Explain the competitive behavior of manufacturing firms • The cost of their inputs is different at each location • Manufacturers must account for the transport of the inputs and the outputs • Perfectly competitive product market, with firms that have little or no control over price • To maximize profits they must minimize costs: • Input prices, substitutability of inputs • Transportation costs: • of the inputs to the production site • of the outputs to the market

32. Factors influencig the location of manufacturers • Least-cost location • Firms will use different proportions of inputs (eg. Labour force, raw materials) depending on their costs at various locations (Input prices, substitutability of inputs, production function); • Internal economies of scale • Without internal economies of scale location is not an issue because households will be self sufficient, • Transport costs • resource-oriented firms – located near resources • transport-oriented firms – located next to inputs or markets, depending on whether the input or the output is more costly to transport • Footloose firms – for which transport costs are not important, they don’t need immobile resources – decision is dictated by agglomeration economies