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The Economics of Urban Growth Dr. Adnan A. Alshiha.

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1 The Economics of Urban Growth Dr. Adnan A. Alshiha

2 Determinants of the Growth process The distribution of resources.The distribution of resources. Relative mode of production.Relative mode of production. Level of demand.Level of demand. The efficiency of price system.The efficiency of price system.

3 The Principles of Location Analysis People want to locate where they can maximize their satisfaction.People want to locate where they can maximize their satisfaction. Producers desire to locate where their profit are expected to be maximize.Producers desire to locate where their profit are expected to be maximize. Producers motives are more important than worker motives. Why? Because:Producers motives are more important than worker motives. Why? Because: Businessman has more to lose. Businessman has more to lose. More change in the pattern that determine firm preferences than the pattern that determine consumers preferences. More change in the pattern that determine firm preferences than the pattern that determine consumers preferences.

4 The Principles of Location Analysis We begin with producers decision.We begin with producers decision. Production process is consist of three stages:Production process is consist of three stages: Procurement. Procurement. Processing. Processing. Distribution. Distribution. Procurement and Distribution have a common determinant: transportation cost Procurement and Distribution have a common determinant: transportation cost

5 Transfer Cost and Firm Location The reduction of transfer costs is a strong incentive to concentrate the three stages of production at a single point in space.The reduction of transfer costs is a strong incentive to concentrate the three stages of production at a single point in space. Transfer cost must be consider in relation to distance.Transfer cost must be consider in relation to distance. For given modes of transportation, transfer cost per unit of product increase with distance.For given modes of transportation, transfer cost per unit of product increase with distance. But at longer distance, the increase begin to tail off.But at longer distance, the increase begin to tail off. In other word, as distance increases, the marginal cost of shipping a good anther kilometer decline.In other word, as distance increases, the marginal cost of shipping a good anther kilometer decline.

6 Transfer Cost –Distance Relationship Barge Rail Truck Distance Transfer cost

7 How Do Transfer Cost Affect Individual Producer? Consider a producer (bakery) in single linear market, where neither the volume of business nor his processing cost varies with his location.Consider a producer (bakery) in single linear market, where neither the volume of business nor his processing cost varies with his location. The bakery hires a boy for deliveries and the boy can carry only one customers order at a time.The bakery hires a boy for deliveries and the boy can carry only one customers order at a time. Where the firm locate to minimize the boy trips?Where the firm locate to minimize the boy trips? The mean or Average distance?The mean or Average distance? The mode?The mode?

8 Single Materials and Market site Location Problem If the marginal procurement cost exceeds the marginal distribution costs, it will pay to locate at the material site.If the marginal procurement cost exceeds the marginal distribution costs, it will pay to locate at the material site. When firms market are cities and the marginal procurement cost relatively low, we would expect firms to locate in citiesWhen firms market are cities and the marginal procurement cost relatively low, we would expect firms to locate in cities

9 Single Materials and Market site Location Problem DistanceMaterial Site Market Site Distribution Procurement Total Transfer Costs

10 Single Materials and Market site with Terminal Cost and Transfer Economies Total Cost Distribution Procurement Distance

11 Single Materials and Market site with Terminal Cost and Transfer Economies It will pay producer to locate at the material site or the market site. For at these points the firm could save terminal cost on materials or the final product.It will pay producer to locate at the material site or the market site. For at these points the firm could save terminal cost on materials or the final product. In general, producers will be oriented toward markets when the product:In general, producers will be oriented toward markets when the product: 1- is weight – gaining manufacturing, as beer.1- is weight – gaining manufacturing, as beer. 2- has higher transfer costs on distribution, than on procurement2- has higher transfer costs on distribution, than on procurement 3- is perishable, as are ice, baked goods, and fresh agricultural product.3- is perishable, as are ice, baked goods, and fresh agricultural product.

12 The Location Decision of Persons Firms motives are more important in determining the location of economic activities than persons motive.Firms motives are more important in determining the location of economic activities than persons motive. It follows, that people will tend to be pulled to the center or areas of rising economic activity.It follows, that people will tend to be pulled to the center or areas of rising economic activity. People will be pushed away from areas having low levels of income per capita or wage rate and high unemployment level.People will be pushed away from areas having low levels of income per capita or wage rate and high unemployment level. pull and push factors diminish as distance between the two cities increases (people have lee information).pull and push factors diminish as distance between the two cities increases (people have lee information). These ideas can be expressed in simple gravity model.These ideas can be expressed in simple gravity model.

13 Models of Urban Growth A short – Run Model Income Determination.A short – Run Model Income Determination. Urban Economic Base Models.Urban Economic Base Models. Central – Place Models.Central – Place Models. Input-Output Models.Input-Output Models.

14 A short – Run Model Income Determination The Keynesian multiplier: reciprocal of the quantity (1 minus the marginal propensity to consume).The Keynesian multiplier: reciprocal of the quantity (1 minus the marginal propensity to consume). When any given change in spending is multiplied by the multiplier, one get the final change in income. When any given change in spending is multiplied by the multiplier, one get the final change in income. Example:Example: If people spend ¾ of any given change in their income, the multiplier will have a value ofIf people spend ¾ of any given change in their income, the multiplier will have a value of 1/(1-3/4) 1/(1-3/4)

15 A short – Run Model Income Determination Aggregate income or production (Y) =the sum of consumption (C), Investment (I), Government expenditure (G), and net export (X).Aggregate income or production (Y) =the sum of consumption (C), Investment (I), Government expenditure (G), and net export (X).

16 Urban Economic Base Models The economy of the city may be divided into two sectors:The economy of the city may be divided into two sectors: 1- The exporting or basic sectors. 2- The service or non-basic sector. The basic sector is the key to growthThe basic sector is the key to growth

17 Basic and non-basic 1- The exporting or basic sectors:1- The exporting or basic sectors: bring income into the city by selling goods and services outside the citybring income into the city by selling goods and services outside the city 2- The service or non-basic sector whose output sold within the city2- The service or non-basic sector whose output sold within the city

18 Economic-Base Studies Base studies were done by estimating the amount of employment that was used to produce goods and services sold outside the city.Base studies were done by estimating the amount of employment that was used to produce goods and services sold outside the city.

19 Methods of estimating export employment The location quotientThe location quotient The minimum-requirementThe minimum-requirement

20 The location quotient For any sector is found by comparing that sectors share of the total employment in the city with the share of employment for that sector in benchmark area.For any sector is found by comparing that sectors share of the total employment in the city with the share of employment for that sector in benchmark area. Example:Example: If the chemical sector in a given city has 20% of the citys total employmentIf the chemical sector in a given city has 20% of the citys total employment While chemical share of total employment in Saudi Arabia is only 10%While chemical share of total employment in Saudi Arabia is only 10% This method allocate ½ of the chemicals employment in the city to export.This method allocate ½ of the chemicals employment in the city to export.

21 The minimum-requirement Involve arraying the Percentage of total employment of industry for number of cities.Involve arraying the Percentage of total employment of industry for number of cities. Cities are grouped according to population size classCities are grouped according to population size class The percentages are arrayed from smallest to largest.The percentages are arrayed from smallest to largest. The lowest percentage is considered that share of employment rquired to service local needs. The lowest percentage is considered that share of employment rquired to service local needs. The remaining employment is said to be basic.The remaining employment is said to be basic.

22 Change Non - Basic Basic WageWage S D D S S Employment

23 Central – Place Models Explain the size, number, and distribution of towns across space.Explain the size, number, and distribution of towns across space. The word central comes from the relatively efficient location of the city with respect to its hinterland.The word central comes from the relatively efficient location of the city with respect to its hinterland.

24 Degree of Centrality Is measured by its order.Is measured by its order. High-order cities offer high-order goods, have many establishment, large population, and a vast hinterland.High-order cities offer high-order goods, have many establishment, large population, and a vast hinterland. High-order good: are shopping goods the consumer would travel a sizable distance to purchase (mink coats, diamond, professional sport).High-order good: are shopping goods the consumer would travel a sizable distance to purchase (mink coats, diamond, professional sport).

25 Lower-order places: provide lower-order good to small surrounding areas.Lower-order places: provide lower-order good to small surrounding areas. Lower-order goods are primary necessities, such as groceries and gasoline, which require frequent purchase with minimal travelLower-order goods are primary necessities, such as groceries and gasoline, which require frequent purchase with minimal travel

26 Origin and Size of Central Places Are explained by two concepts:Are explained by two concepts: Threshold: is the minimum level of demand required to support the production of good by (at least) a single establishment.Threshold: is the minimum level of demand required to support the production of good by (at least) a single establishment. Once production is originated for any good, how far does the market extend? This is determined by the range.Once production is originated for any good, how far does the market extend? This is determined by the range. The range: delineates the zone around any central place from which a person travel to obtain the good.The range: delineates the zone around any central place from which a person travel to obtain the good. Since the price of any good rises with distance the range is limited by the relevant transportation cost.Since the price of any good rises with distance the range is limited by the relevant transportation cost. Technically, the boundary of the range is that point in space where a person is indifferent in choosing between two central places that offer the same good.Technically, the boundary of the range is that point in space where a person is indifferent in choosing between two central places that offer the same good.

27 Input-Output Models Describe the interrelationships among industries and final users of products for any economy.Describe the interrelationships among industries and final users of products for any economy. Industries are defined on product basis, each industry produce a single homogeneous product.Industries are defined on product basis, each industry produce a single homogeneous product. Final users (final demand): consumer, government, investors and export.Final users (final demand): consumer, government, investors and export. The model shows how the output of each industry is distributed to all of its users.The model shows how the output of each industry is distributed to all of its users. The model also show the purchases of inputs from all other industries or sectors.The model also show the purchases of inputs from all other industries or sectors.

28 The Input-Output Table Sector 1 sector2 Final demand Total Gross output Sector 1 SR.20SR.40SR.40SR.100 sector2 30 30 80 80 90 90 200 200 Value added 50 50 80 80 TGO 100 100 200 200 300 300 Purchase from Sale to

29 Direct coefficient per Riyal of Output Sector 1 Sector 2 Sector 1 0.20.2 Sector 2 0.30.4 Value added 0.50.4

30 Direct and indirect requirements per Rial of delivery of Final Demand Sector 1 Sector 2 Sector 1 1.430.48 Sector 2 0.711.90 Impact Multiplier 2.142.38

31 Distributional Impact of Urban Growth How income is distributed?How income is distributed? The importance of This issue to contemporary urban poverty and other problem is self- evidenceThe importance of This issue to contemporary urban poverty and other problem is self- evidence In general, the distribution of income is determined by how things are produced and the taste of consumers.In general, the distribution of income is determined by how things are produced and the taste of consumers.

32 Is urban Growth Immutable? The urban size ratchet: the rate growth never fall bellow zero.The urban size ratchet: the rate growth never fall bellow zero. This is a reasonable explanation why big cities continue to growThis is a reasonable explanation why big cities continue to grow

33 Is There an Optimum Sized City? Demand and comparative advantage act as limits on the size of cities.Demand and comparative advantage act as limits on the size of cities. The problems of pollution, congestion, and interjurisdictional spillover could be classified as possible symptoms of excessive urban size.The problems of pollution, congestion, and interjurisdictional spillover could be classified as possible symptoms of excessive urban size. Optimal city size is reached when the additional social benefits of adding anther person to the city are exactly equal to the additional social cost.Optimal city size is reached when the additional social benefits of adding anther person to the city are exactly equal to the additional social cost. That is, when the marginal social utility of adding anther person is zeroThat is, when the marginal social utility of adding anther person is zero


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