1. MSA FIPS to CBSA FIPS in Class Website

2. Discussion –Big League Cities or Big League Losers –Are Sports Facilities a Good Public Investment? –What is the market failure? –Should tax payers pay for it?

3. Discussion (Cont) Table 1 Siegfried and Zimbalist (JEP, 2000)

4. Market Area and the Central Place Theorem Chapter 5

5. Goal of Todays Class Explore the interactions between different cities in a regional economy Understand the urban hierarchy (why cities differ in size and scope) Introduce the Central Place Theorem

6. Cities in the United States (Source U.S. Census) City 1990Urbanized Area 1990 CityRankPopulationRankPopulation New York, NY17,323116,044 Los Angeles, CA23,485211,403 Chicago, IL32,78436,792 Houston, TX41,63192,902 Philadelphia, PA51,58644,222 San Diego, CA61,111112,348 Detroit, MI71,02853,698 Dallas, TX81,00783,198 Phoenix, AZ9983142,006 San Antonio, TX10936311,129

7. Cities in the World (Source U.N. Population)

8. Basic Definitions Market Area: Area over which a firm can underprice its competitors. Net Sale Price: Sum of the price charged by the store, plus the travel costs incurred by the consumers. Distance to Center $ 30 20 10 0 10 20 30

9. Equilibrium with Monopolistic Competition Story of the Model: Start with one firm: Monopoly As the firm makes extra economic profits other firms will enter the market: Monopolistic Competition

10. Only One Firm: Monopoly More Than One Firm: Monopolistic Competition $ Q MC DMR QmQm PmPm ATC PROD $ Q D MR QeQe PePe ATC PROD MC

11. Efficiency Tradeoffs As firms enter into the market, the firms demand curve shifts to the right, moving the quantity produced at a point different than min ATC PROD As firms enter into the market, the travel cost for consumers decreases $ Q ATC PROD Average Travel Cost ATC Q e Q t Q m Q pc

12. Equilibrium Market Areas 302010 0 102030 $ Distance from Center of Region Firms 1 Territory Firms 2 Territory Firms 3 Territory

13. An Algebraic Model of Market Areas What are the factors that determine the area of a market oriented firm M? –d Per Capita Demand –e Population Density (per Square Mile) –q Output of the Typical Music Store

14. Determinants of Market Areas Changes in Demand and Population Densities Changes in Scale Economies Market Area and Traveling Costs Market Area and Income (income elasticity of land vs. income elasticity of demand for output)

15. Urban Hierarchies & the Central Place Theorem Shows how the location patterns of different industries are merged to form a regional system of cities The Central Place Theorem answers two main questions: –How many cities will develop –Why some cities are larger than others

16. Central Place Theorem (A Model) Population Density –Distributed Uniformly at Beginning –Regions Population X No Shopping Externalities Ubiquitous Inputs Uniform Demand Three industries: –Industry I: Requires a population of X –Industry II: Requires a population of X/4 –Industry III: Requires a population of X/16

17. CPT Model (Cont) Industry I will locate in the center of the region, just as the Median Location Theorem predicts. Workers will want to live close to the store and City A will be born. There is enough people for 4 stores of Industry II, two of these stores will locate in City A and the other two stores will split the region in two creating two cities City B and City C. There is enough people for 16 stores of Industry III, because there are already 3 cities, some stores will go to these cities: –City A will get 4 stores of Industry III –City B and City C will get 2 stores each of Industry III –The other 8 stores will split the region into equal parts, creating 8 smaller City D-City L.

18. CPT Conclusions 1 High Order City: –1 Store Industry A –2 stores Industry B –4 stores Industry C –Population 4*(X/16) 2 Medium Order City –1 store Industry B –2 stores Industry C –Population 2*(X/16) 8 Low Order City –1 store Industry C –Population (X/16) City DCity E City F City G City HCity I City KCity L City B City C City A

19. Relaxing the Assumptions Output Goods are not Perfect Substitutes: –Suppose that output in industry 2 are not perfect substitutes –then stores will cluster to allow consumers to take advantage of shopping externalities –Instead of two Type B cities, all firms in industry will be in City A –Reduces the number of cities, but not the hierarchical order

20. Relaxing the Assumptions Output Goods are Complements: –Suppose that output in industry I and II are complements –then stores will pair up to exploit this complementarity –Instead of two Type B cities and eight Type C cities, type III stores will cluster around all four type II stores –Reduces the number of cities to three, but not the hierarchical order