Chapter 2 Why Do Cities Exit

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Chapter 2 Why Do Cities Exit?
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Our Approach to Answering Question

• List economic assumptions necessary to generate a
• region without cities -
• area with uniform distribution of population
• Relax an assumption, see how region changes
• Continue relaxing assumptions until we get a
• region with cities -
• region with densely populated areas

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Characteristics of Simple Regional Economy

• Households produce and consume 2 goods
• Shirts
• Bread
• Households use 2 inputs to produce shirts and
  bread
• Land to grow raw materials
• Corn for cornbread (its in the South)
• Sheep for wool for shirts
• Time (labor) to transform raw materials into
  goods
• Households travel within region by foot

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Economic Assumptions for Region Without Cities

• Equal productivity of resources
• All households are equally productive
• All land is equally productive
• No economies of scale in production
• Cost per unit is independent of quantity produced
• No cost advantage in large scale production
• No scale economies in transportation
• Cost per unit is independent of quantity shipped
• No cost advantage in shipping large quantities

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Consequences of Assumptions 1 and 2

• Equal Productivity of Resources
• plus ?
• No Economies of Scale in Production
• ?No advantage in specialization and trade
• Trade ? households being worse off
• Trade takes time to transport goods
• Lost time ?
• Less production ? Fewer goods to consume
  AND less time for work and leisure

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Consequence of Region without Trade

• Region without Cities
• Uniform spatial distribution of households
• Why?
• Clustering of households at certain locations ?
• Demand for land ? ? Price of land ? ?
• Households in higher density locations worse off
  ?
• Households in lower density locations better off
  ?
• Migration from higher density to lower density
  areas until
• price of land does not vary spatially
• Density of households is uniform spatially

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Consequence of Relaxing Assumption of Equal
Productivity

• When all households are not equally productive,
• then trade may be beneficial.
• Remember, all you need is different opportunity
  costs to have the potential for trade.
• Comparative Advantage
• when some households are relatively more
  productive at producing one of the goods

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Assume HHs in North are absolutely more
productive
The North has 21 advantage in bread
production 61 advantage in shirt production ?
North has a comparative advantage in shirt
production
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Opportunity Cost Approach

• Bread
• It costs the South 1 shirt to produce 1 bread
• It costs the North 3 shirts to produce 1 bread
• Shirts
• It costs the South 1 bread to produce 1 shirt
• It costs the North 1/3 bread to produce 1 shirt

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Region that has lower opportunity cost
has the comparative advantage
South has comparative advantage in bread
production North has comparative advantage in
shirt production
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Remember

• Our initial assumption is that nobody
  specializes
• Everyone makes their own stuff
• No trade
• Now lets relax some assumptions.

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Assume HH in North switches 1 hour to shirt
production HH in South switches 3 hours to bread
production
Specialization ? output of both goods? (note Not
quite the book example)
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Assume exchange rate 2 shirts for 1 loaf of
bread North trades 6 shirts for 3
loaves South trades 3 loaves for 6 shirts
At this price
The N gets 1 more B
The S gets 3 more S
Spec. Trade ? are both regions better
off? Potentially!!!...but,
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What about Transportation Costs?
Assume transportation cost for trade 1 hour
walkingthis means 1 hour lost for production!
It cost the north 2 bread to move its shirts to
market
it cost the south 1 shirt to move its bread to
market
Trade ? South better off, North worse off!
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Transportation Costs Lower
Assume transportation cost for trade 1/5 hr
walking
At 1/5 hour of walking, trade will occur.
Spec. Trade ? both regions better off when
transportation cost lt ½ hour
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Conclusions

• HH better off to specialize and trade when
• They differ in productivity such that each has a
  comparative advantage
• Transportation costs are low relative to gains
  from trade
• However, there will still be no cities cities
  when
• No economies of scale in production
• No economies of scale in transportation

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Relaxing Assumptions 1 and 2

• Differences in productivity of HH
• (with low transportation costs vs gains from
  trade)
• plus
• Economies of scale in transportation
• ? Existence of Trading Cities!

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• Constant Returns to Scale in Transportation
• Cost per unit is independent of quantity shipped
• No cost advantage in shipping large quantities
• Economies of scale in transportation
• Cost per unit decreases with the quantity shipped
• Cost advantage in shipping large quantities

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• Constant Returns to Scale in Transportation
• Jack makes living carrying people across river on
  his back
• 1 round trip 10 minutes
• 1 person ? ? 10 minutes
• 2 persons ?? 20 minutes
• 6 persons ?? 60 minutes
• Transportation cost / unit total time required
  / number units transported
• 1 person 10 minutes / 1 person 10 minutes /
  person
• 2 persons 20 minutes / 2 persons 10 minutes
  / person
• 6 persons 60 minutes / 6 person 10 minutes /
  person
• ? Cost per unit is independent of quantity
  shipped

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• Economies of Scale in Transportation
• Jack builds ferry (raft, rope pulleys, and
  mule)
• Trip with 1 person ? 8 minutes
• Trip with 2 persons ?? 10 minutes
• Trip with 6 persons ?? 15 minutes
• Transportation cost / unit total time required
  / number units transported
• 1 person 8 minutes / 1 person 8 minutes /
  person
• 2 persons 10 minutes / 2 persons 5 minutes /
  person
• 6 persons 15 minutes / 6 persons 2.5 minutes
  / person
• ? Cost per unit decreases with quantity shipped
• The difference in time above is just the time to
  load and unload the ferry.

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Scale Economies in Transportation ? Middle Folk,
Trading Cities

• Cost advantages for shipping large quantities ?
  transportation specialists
• Transportation specialists will locate on
  boundary between 2 regions, convenient to HH for
  whom trade is feasible
• Markets with trading specialists (retailers) will
  also develop on boundary between 2 regions
• Middlefolk _at_ markets ? population density ?
• ? creation of trading city

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Trading Cities and Scale Economies in
Transportation

• 1837  The area now comprising the central city
  of Atlanta was chosen as the site for a new
  railroad terminus connecting Georgia with
  Chattanooga, TN and points west, including the
  Chattahoochee and Tennessee Rivers.  The city was
  dubbed "Terminus," and the termination point is
  now Five Points in downtown Atlanta.

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Conditions Necessary for Trading Cities

• Producers outside trading city produce more than
  they consume
• Surplus in production feeds and clothes
  middlefolk in trading city
• Gains from trade due to comparative advantage gt
• transportation and merchandising costs
• Scale economies in transportation and
  merchandising ?
• Trading City - concentration of middlefolk
  efficient at trade and transport

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Market Area Determination

• Producers (market-oriented)
• Producers (resource or materials-oriented)

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4/12 2(1/12)
Price 2 miles from Factory
Price at Factory
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Market-oriented Factory Towns

• The market area is determined by transportation
  costs and the cost of home production
• Workers will live close to factory ? land ?
• Workers use less land for housing ?pop density ?
• TOWNS!!!

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(No Transcript)
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A System of Factory Towns
Each factory has a local monopoly
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Resource-oriented Processing Towns(sugar beets
to sugar)

• Sugar beet processing is subject to scale
  economies.
• More lbs of beets processed means progressively
  lower costs per lb.
• Market area is determined by the net price
  received by farmers for their beets.
• Farms located close get near 40 per ton, farmers
  located further out get less after transport
  costs are incurred.

Farmers located here are indifferent between
processors. Each plant/city has a local monopsony.
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Market and Resource Oriented

• Market-Oriented Usually think of it as a
  weight-gaining processcar assembly plants are
  located near large cities, where most of the
  consumers are.
• Resource-Oriented Usually think of it as a
  weight-losing production processlike the sugar
  beets example. Locate near resource(s) because
  it reduces transportation costs. Final goods are
  lighter than inputs.

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Questions to Ponder

• Page 31
• 1, 4

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• The matter transporter
• a. The transmitter decreases the unit transport
  cost (to zero), so the differences in comparative
  advantages can be fully exploited. The volume of
  trade increases. Given the high cost of the
  transmitter, there will be larger economies of
  scale in exchange, so trade will be handled by
  firms in trading cities. The transmitter will
  eliminate labor used in the actual transport of
  products (no workers on horse-drawn wagons), but
  the increased trade will increase the amount of
  labor required for accounting, finance, and
  insurance, so total employment could (but, not
  necessarily) increase, potentially increasing the
  population of the trading city.
• b. If the transmitter is sufficiently cheap,
  every household will get one and engage in direct
  trade with another specialized household. In
  this case, the transmitter eliminates scale
  economies in exchange, causing the trading city
  to disappear. We are back to evenly distributed
  population.

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• Beer versus Wine
• a. Beer production is a weight-gaining activity
  because breweries add local water (a ubiquitous
  input) to other ingredients. Brewing is a
  market-oriented industry, so it locates close to
  its consumers to economize on transport cost.
  Wine production is a weight-losing activity, as
  only part of the grape is used in production (the
  skins are not used) and the grapes are costly to
  transport because they spoil quickly. Firms in
  the materials-oriented industry locate close to
  input suppliers to economize on transport cost.
• b. Wineries locate at mile 15 and 45, while
  breweries locate at mile 30 and at mile 90 (each
  at the middle of a 60-mile territory)