In economics we use the concepts of profit maximization and utility maximization to understand why individuals and firms make the decisions that they make Geographers study the spatial distribution of human activity In urban economics, we use profit and utility maximization to understand location choices Urban Economics: Economics meets geography

Course Goals Learn to use economics to study issues and problems of urban areas Learn to apply these methods to answer policy questions

Why do cities exist? City size Urban Growth Part 1: Market forces in the development of cities

Price of land within cities Patterns of land use Urban Sprawl Neighborhood choice, segregation Part 2: Land use within cities

External costs of automobile travel Mass transit Part 3: Urban transportation

The role of local government Local Government revenue Part 4: Government Policy

Part 5: Urban Problems Crime Housing Policy Poverty

Place with a relatively high population density Census definitions Urban area: minimum population = 2,500 Urban population: people living in urban areas Metropolitan area: at least 50k people Micropolitan area: 10k to 50k people Principal city: largest municipality in metro area What is a City?

Why Do Cities Exist? Economies of scale make factories more efficient than home production – everyone benefits when more goods are produced Factories tend to cluster together (we will discuss this Thursday)

Agricultural surplus is required in order for city dwellers (and farmers!) to have enough to eat Urban production of goods to exchange for food Think of an individual household of four people and two goods: food and books. Enough food produced for whole household by two workers. If books produced at home, only 1 book per worker per week. If books produced in factory, two books per worker per week (economies of scale, etc.). Transportation system for exchange between industrial and agricultural areas Conditions for Cities

Locational equilibrium: No incentive to move Examples of prices behind locational equilibrium Rent on beach house > Rent on highway house Wage in Coolsville < Wage in Dullsville Land rent in center > Land rent on fringe Axiom 1: Prices Adjust to Achieve Locational Equilibrium

Self-reinforcing effect: leads to changes in same direction Auto row attracts comparison shoppers Cluster of artists attracts other artists Axiom 2: Self-Reinforcing Effects Generate Extreme Outcomes

Externality: cost or benefit of a transaction experienced by someone else External cost: burning gasoline affects breathers External benefit: painting a peeling house increases property values Axiom 3: Externalities Cause Inefficiency

Economies of scale: Average cost decreases as quantity increases Indivisible inputs: Required to produce one or a thousand units Factor specialization: Benefits from continuity and repetition Extent of scale economies varies across activities Axiom 4: Production is Subject to Economies of Scale

Entry into market continues until economic profit is zero Economic cost includes explicit cost and opportunity cost of time and funds Firms earn just enough to stay in business, but not enough to attract entrants Axiom 5: Competition Generates Zero Economic Profit