1 / 12

Why do cities exist?

Why do cities exist?. Market Forces. Comparative Advantage. Trading with each other Suppose that in East, residents can produce 1 bushel of wheat, and 1 bolt of cloth per labor-hour. In West, residents can produce 2 bushels of wheat, and 6 bolts of cloth per labor-hour.

kimberly
Download Presentation

Why do cities exist?

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Why do cities exist? Market Forces © Allen C. Goodman, 2006

  2. Comparative Advantage • Trading with each other • Suppose that in East, residents can produce 1 bushel of wheat, and 1 bolt of cloth per labor-hour. • In West, residents can produce 2 bushels of wheat, and 6 bolts of cloth per labor-hour. • Can they (do they) trade? © Allen C. Goodman, 2006

  3. Comparative Advantage Output per Labor Hour East West Wheat 1 2 Cloth 1 6 © Allen C. Goodman, 2006

  4. Why trade? East West 2 Wheat 1 6 1 Cloth © Allen C. Goodman, 2006

  5. Suppose West offers 2 cloth for each wheat East West East specializes in wheat. Trades with West. 2 West trades “small amount” with East. Why? Wheat 1 Wt Ct Wc Wt 6 1 Cloth © Allen C. Goodman, 2006

  6. Why trade? • We can gain from trade. • We can be better off. • Will East be as well off as West? • Why or why not? © Allen C. Goodman, 2006

  7. Why do cities trade? • There must be an agricultural surplus. Why? • There are scale economies in transportation (train terminals, shipping docks, etc.) • People locate in cities to take advantage of the transportation scale economies. What happens to the price of land? © Allen C. Goodman, 2006

  8. Scale Economies in Production • Why don’t we build our own cars? A> There are obviously economies of scale. • Two reasons • Factor specialization • Indivisible inputs © Allen C. Goodman, 2006

  9. Factor specialization • Workers’ skills increase with repetition. • Workers spend less time switching from task to task. Labor time (hrs. per yd.) 0.50 Ave. labor time 0.25 600 400 200 Volume of cloth © Allen C. Goodman, 2006

  10. Market areas • Why do people buy goods from someone else? A> It’s cheaper, even if they have to travel to get them. • Two components to the cost of the cloth. • 1. Production cost. • 2. Travel cost to get the cloth. © Allen C. Goodman, 2006

  11. Cost of homemade cloth 1.00 0.75 Net cost of cloth (hrs.) Travel cost 0.50 0.25 Factory cost 4 3 2 1 0 1 2 3 4 Miles from factory Mkt. area of cloth factory © Allen C. Goodman, 2006

  12. Next • Klepper, Sections I, II, VII and Table 1 • OS – Chapters 2 and 3 © Allen C. Goodman, 2006

More Related