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URBAN ECONOMICS

URBAN ECONOMICS. SPRING 2008. Why do cities exist?. 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?. Let’s build up a model… Assumptions :

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URBAN ECONOMICS

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  1. URBAN ECONOMICS SPRING 2008

  2. Why do cities exist?

  3. 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?

  4. Let’sbuildup a model… • Assumptions: • Theregionproducesandconsumestwogoods: shirtsandbread. 2. Peopleuselandtogrowrawmaterialsandtake time totransformrawmaterialsintoshirtandbread. 3. Travelwithinthisregion is byfoot. Residentswalk at a speed of 8 milesperhour.

  5. Supposethat: • Allresidentsareequallyproductive at producingbreadandshirts. Similarlyallland is equallyproductive in production of rawmaterials. Thisassumptionimpliesthatthere is no roomforcomparativeadvantage. Since allresidentsareequallyproductive at producingbreadandshirts, there is no advantage of trading.

  6. 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. • Let’s say that the region has two parts: South and North. The production amounts in each region are given below:

  7. South has a comparative advantage in production of bread. North has a comparative advantage in production of shirts.

  8. 2. Suppose that there are no scale economies in transportation. Transport cost per unit of shipped per mile is independent of the volume shipped. But, if transport cost per mile decreases as the volume transported increases, it would be cheaper to transport shirts and bread in bulks. This also creates intermediaries in transportation. What are the implications?

  9. Thetradingfirmswilllocate at placesconvenientforthecollectionanddistribution of goods. Hence, marketplacesdevelop at crossroads, portsandothershipmentpoints. Thelocationdecisions of thetradingfirmscausethedevelopment of cities. Themarketplacewillcreateemploymentopportunities. Theemployeeswilllivenearmarketplacetoeconomize on commutingcosts. Hence, demandforlandnearmarketplaceincreases: Price of landincreases. Residentswilleconomizebyoccupyingsmallerlots. As a result, populationdensityaroundthemarketplacewill be higherthanthe rest of theregion.

  10. 3. Supposethatproduction is subjecttoconstantreturnstoscale. Thismeans, eachworker can produceeither 1 shirtor 1 breadperhourregardless of howmuch he/sheproduces: Thereare no advantagesfromproducing at largescales. Ifwerelaxthisassumption, andimposeassumption of scaleeconomies, thenfactoryproductionmayreplacehomeproduction. How?

  11. If there are scale economies (instead of CRTS) in production, as volume of shirt production increases, labor required to produce one shirt decreases (less input per unit of output, costs decline with output). Labor time/shirt Average labor time Number of shirts

  12. Whydoestheaveragelabor time decrease as number of shirtsproducedincreases? • Factorspeacialization: Eachlaborerspecializes in onetaskandtheirproductivityincreases. • Indivisibleinputs: Someinputsareindivisible since theyhave minimum efficientscale. E.g. Machines in a factory. As outputincreasesfactoryusesmoreindivisibleinputshenceproductivityincreases.

  13. Iftheshirtfactoryproduces 400 unitswith 100 workersand 4 shirtsperworkerperhour: Whatshould be thewagelevelandprice of a shirt? Wageshould be at leastas high as tomakeworkersindifferentbetweenworking in thefactoryandworking at home. Iftheworkerworks at home: He/sheproduces 1 loaf of bread/hr. Iftheworkerworks at thefactory: He/sheproduces 4 shirts/hr. Hence, minimum wageshould be 1 loaf of bread/hr.

  14. Since eachworkerproduces 4 shirts/hr, assumingthatthereare no othercosts, productioncost of oneshirt is 0.25 loaf of bread. Net price of a factoryshirt: Pricepaidbyconsumertofirm (0.25 loaf) + Consumer’sopportunitycost of the time spenttravelingtoandfromthefactory (Loss of breadproductionduetotravelinginstead of producingbread).

  15. A resident can produce 1 loaf per hr. It will be sensible to buy a factory shirt if net price of a factory shirt is at most 1 loaf. Since, production cost is equal to 0.25 loaf, the consumer should consider the time that a trip takes. 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.

  16. Supposethatwalking time is 8 milesperhour. Accordingtothesecriteria, themarket areaof theshirtfactory is determined. It is theareaforwithinwhichthefactorywillunderpricehomemadeshirtsforresidents. Inourcase, it is defined as theareawithin 3 miles of thefactory. Why? (We can have at most 0.75 hrswalking time, thismeans since walking time is 8 miles/hr, we can have 6 milesfortwowaywalking –toandfromthefactory-. That is whyweendupwith a circlewith a radius of 3 miles).

  17. Factory causes the development of a small factory city.

  18. Arethereanylimitstocity size? • Freightcost: Wehaveassumedthatconsumerstravelbetweenhomeandfactorymeaningtheytheythemselvesincurfreightcosts. Thiscost of transportinggoodslimitstheability of thefactorytoexploiteconomies of scale in production. What can thefactory do? Weknowthattravelspeed is 8 miles/hr. and market area is a circlewith a radius of 3 miles. Ifthefirmbecomesresponsiblefromfreightcostsandcreates a methodtoincreasethetravelspeed, then it can create a greater market area. E.g. Ifthefirmincreasesthetravelspeedto 16 milesperhr (doubles), market areawill be a circlewith a radius of 6 miles. Thiswillincreasetheoutput of thefactory, factory’sworkforceandpopulation of thefactorycity.

  19. Decrease in freight cost allows factory to more fully exploit economies of scale, increasing city size. • Transportation is a very important factor affecting the city size. • Think about examples from Turkey, Europe…

  20. 2. Scale economies: As economies of scale beacome more powerful, cost of factory production decreases relative to home production. Hence, market area of the factory increases and size of factory cities increase. Think about the industrial revolution: Spinning jenny to the machines.

  21. 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, a hand-powered multiple spinning machine that was the first machine to improve upon the spinning wheel.

  22. 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.

  23. What can be done? Metro, easier transportation methods, etc.

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