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Urban Economics Economics 153 Pomona College

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1 Urban Economics Economics 153 Pomona College

2 Individual Activity (5 minutes) Think of one city, any city: What are the costs associated with living in that city? What are the benefits associated with living in that city? Write your answers.

3 Activity by Pairs (5 minutes): Discuss the benefits and costs of living in one city with another member of the class. What are the similarities, and what are the differences.

4 Punch line: Cities will exist as long as the benefits associated with living in cities are greater than the costs.

5 What is Urban Economics? Definition: Urban Economics is the study of the location choices of firms and households, and the consequences of these choices. Urban economics examines the question of where of economic activity: 1) Households choose where to work 2) Households choose where to live 3) Firms choose where to locate its factory, office or store.

6 Why are cities interesting to Economists: Creation and Innovation: People share ideas and develop new products and production techniques. Learning in Cities: Contacts in a city facilitate the exchange of knowledge. Trade and Production in Cities(1): Cities provide economies of scale that make the production of goods and services more efficient. Trade and Production in Cities(2): Cities are a gathering place for buyers and sellers: they facilitate trade. Consumption in Cities: Since there are more consumers in cities, there will be demand for many goods and services.

7 What are Economies of Scale? When a firm or industry’s average cost decreases when quantity produced increases. Marginal Cost is lower than average cost. Cities exist because it is efficient to produce some goods in large scale. Economies of Scale arise because of: 1. Factor Specialization 2. Indivisible Inputs are shared

8 Definition of a City: An area with relatively high population density that contains a set of closely related activities

9 A 2X2 Model of a City Economy Outputs: Shirts and Bread Inputs: Land and Time Travel technology 8 mph 3 “City-Less” assumptions: A1) Equal Productivity in Production. A2) Constant Returns to Scale in Production. A3) No Scale Economies in Transportation. A1-A3 uniform price of land and uniform population density. If people gather around one area, price of land will go up, no gains from this.

10 Relax Equal Productivity Assumption (1) Gains from trade due to differences in productivity. Output per HourOpportunity Costs SouthNorthSouthNorth Bread121 shirt3 shirts Shirt161 loaf1/3 loaf

11 Relax Equal Productivity Assumption (2) Exchange at a rate of 2 shirts for one loaf NorthSouth BreadShirtsBreadShirts ∆ Prod-2+6+3-3 Exchange+3-6-3+6 Gain+1 0 0+3

12 Relax Equal Productivity Assumption (3) Both people in the north and in the south are better off. Still no cities, each southern household trades with a northern household.

13 Trading Cities Relax Economies of Scale in Transportation Assumption Transportation cost per unit decreases. Efficient to have middlemen to collect, transport and distribute the bread and shirts. Trading firm will locate in a place convenient to distribution: crossroads, port or river. Firm employees will want to live close to the firm. Price of land will go up, land plots will be smaller, and city population density will increase.

14 Factory Cities Relax Constant Returns to Scale Assumption (1) Scale Economies because of factor specialization and indivisible input sharing. Worker is willing to work in as long as the worker gets paid more in the factory than what she can make by herself. A consumer will buy from the factory as long as the price paid to the factory plus the cost of commuting is less than what she could do at home. Workers want to live close to the factory, bid the price of land up, land plots become smaller and population density increases.

15 Factory Cities Relax Constant Returns to Scale Assumption (2) A worker from the south produces 1 loaf or 1 shirt by herself. She produces 4 shirts in the factory and gets paid 1 loaf of bread (shirt cost is ¼ loaf). The factory cost of the shirt is ¼ loaf. Commuting takes 8 miles an hour. The consumer can produce 1 loaf in an hour (commuting cost per mile is 1/8 loaf). Fig 2-2

16 The size of the city Transportation speed: as traveling becomes faster the size of the city increases. Technology: Lower costs from economies of scale increase the size of the city. Wages: As commuting times increase, the worker must be compensated for that time, and the factory costs increase.

17 What is Next: Transportation Costs, learning in cities and Industry Agglomeration Krugman (JEP, 2002)

18 Quigley (1998) Diversity and Cities (Scale Economies)

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