This story clearly tells the tale of an 18th century New England farming family as they pack up the goods the family pr

4. Market or Trading City created if �. 1. High agricultural productivity (surplus)- enough to feed ag families and traders 2. Comparative advantage > cost of transport and trading between households 3. Economies of scale in transportation Trading cities develop Results of market city development Population increases and this bids up the price per acre People use smaller amounts of land Population density increases People can make enough to feed themselves and the traders and workers. Comparative advantages are greater than the transportation costs so trade is profitable If its cheaper to transport/trade more volume, then marketing agents will evolve and create centrally located markets to minimize transportation costs. People can make enough to feed themselves and the traders and workers. Comparative advantages are greater than the transportation costs so trade is profitable If its cheaper to transport/trade more volume, then marketing agents will evolve and create centrally located markets to minimize transportation costs.

5. Factory Town Production is subject to economies of scale (not CRS) Indivisible inputs (sewing machines) Specialization of workers � cut fabric, pin, sew seams, sew buttons Determining Wages and Prices Factory gives wages to make workers indifferent between working at home and in the factory . Prices adjust to ensure locational equilibrium Wage covers worker�s productivity (one loaf) + the higher cost of living in town (1/2 loaf); get the same as rural workers Other inputs (sewing machines) cost � loaf per shirt Total cost per hour =>2.0 loaves; 6 shirts per hour =>1/3 loaf per shirt

6. Land-use given Profitable Factories Economies of Scale in Production As output increases; labor per shirt decreases Factor Specialization Productivity increases with repetition Workers spend less time switching jobs Indivisible Inputs Sewing machines Hard to make equipment for the needs of just 1 person Is there an economic advantage to centralized production? What is as the volume of production increased, the labor required to produce pound of bread decreases. In this case we find that if the firm produces 300 lbs of bread it take about 0.8 hour per lb. If the firm produces 900 lbs, it takes about 0.4 hours per lb. Why? What can cause economies of scale: repetition makes people better at each task less time spent switching between tasks Technology and inputs can use one oven for many pounds of bread � harder to make one that efficiently makes 8 lbs of bread for example Is there an economic advantage to centralized production? What is as the volume of production increased, the labor required to produce pound of bread decreases. In this case we find that if the firm produces 300 lbs of bread it take about 0.8 hour per lb. If the firm produces 900 lbs, it takes about 0.4 hours per lb. Why? What can cause economies of scale: repetition makes people better at each task less time spent switching between tasks Technology and inputs can use one oven for many pounds of bread � harder to make one that efficiently makes 8 lbs of bread for example

7. Shirt Factory Produces 6 shirts per hour f0r each worker Wage per hour >= 1.5 loaves of bread Other input cost (machines) is 0.5 loaves per shirt Price to buy them: household willing to pay less than (opportunity cost of walking to factory +price charged by shirt factory). Price per shirt = 1/3 loaf Net price of factory shirt = 1/3 loaf +time to travel to and from the factory Travel cost = 1/12 loaf per round trip mile So if live 1 miles away = 1/12 loaf; if 2 miles away travel = 2/12 loaf. At 8 miles consumers pay = 1/3 + 8/12 = 1 loaf (indifferent to factory shirt and producing their own shirt.

11. Land Use Pattern around Factory Urban area will develop as factory workers seek to lower commuting costs by living nearby Demand for land nearby increases; bid up price per acre Workers buy smaller parcels due to higher price Population density increases Factory city because Agricultural surplus Scale economies are large relative to travel costs

12. System of Factory Towns Build shirt factories in different locations � sell to area around factory Competition generates zero economic profit if no restrictions on entry Complete labor specialization � workers in town make shirts; rural workers make bread Zero economic profit: factory price = average cost of shirts Locational indifference for workers � wage for factory workers cover opportunity cost and higher cost of urban living (land rent) Land rent in rural area will also change � shorter distance to the factory, lower shirt price, higher price of land (what would happen to density?)

13. Each Shirt Factory has its own market area

14. Changing Land Value due to spatial location Locational indifference in rural areas Lower travel cost at locations close to factory city Rural households bid up the price of land near cities Locational indifference between rural and urban areas Factory wage compensates for higher land prices in cities

15. Resources-Oriented Firms and Processing Towns Market oriented firms will locate near the market due to relatively high cost of transporting outputs. Material-oriented firms will locate near input source due to relatively high cost of transporting inputs Area determined by the net price farmers received

16. Location orientation: Market Market-oriented firm: More costly to transport output than inputs Shirt example: assume input transport cost = 0 Firms oriented toward markets to economize on output transport cost Weight gaining activity: beverages produced from local water & syrup Fragility gaining: Fresh food Bulk gaining: Assembly plants Hazard gaining: Explosives

17. Location orientation: inputs More costly to transport inputs than output Firms oriented toward markets to economize on output transport cost Weight losing activity: produce sugar from beets, lumber from logs, Baseball bats Fragility losing: Canned or frozen food Hazard losing: deodorizing skunks

18. Locate at Input source (least cost)

19. Factory or Processing Towns Processing facilities create processing towns Workers live close to the plant for low commuting costs to work Relatively high population density = small town around the processing plant Shirts create market towns; sugar beets create processing towns Steel � needed to be near coal; energy source

20. Summary Factories form and marketing firms begin because of economies of scale Market/trading cities develop if a) large differences in comparative advantage between regions relative to transportation costs and b) economies of scale in transportation Factory cities develop is economies of scale in production are large relative to transportation costs This generates employment in a fixed area which increases demand for land in fixed supply � price per acre increases � people buy less- population density increases Spatial competition among firms generates a market area for each firm and a system of cities

21. Definitions Constant returns to scale: A worker makes 1 product per hour regardless of how many he/she makes (the amount produced per unit time is independent of the volume produced) Economies of scale in production: the cost per unit produced per hour is less when more is produced. Economies of scale in transport: the transport cost per unit shipped per mile is less when more is shipped. Comparative advantage: a region has a comparative advantage in a good for which its opportunity costs are lower. Opportunity costs: The cost of passing up the next best choice when making a decision. The cost of something in terms of opportunity foregone. The opportunity cost to a country of producing a unit more of a good, such as for export or to replace an import, is the quantity of some other good that could have been produced instead.