Regional Economics

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Regional Economics

• George Horváth
• Department of Environmental Economics
• george_at_eik.bme.hu

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The locational issue of agricultural production

• The earliest spatial economic models addressed
  the problem of the location of agricultural
  production
• One of the most important works was done by
  Johann Heinrich von Thünen
• His 1842 book The Isolated State dealt with the
  question of agriculture and national economy
• His model was one of the first ones to try to
  explain the particularities of agriculture
  originating in location.

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Lets suppose that this is our state
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Assumptions for simplicity

• 1. Lets assume an isolated state, (a territory)
  that
• doesnt engage in export and import
• gets all its food from local products
• all agricultural products are sold on a local
  market

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Assumptions for simplicity
The City (the single market)

• 2. Lets assume there is only a single market
  (state) such that
• all goods are exchanged in the city in its centre
• prices on this market will be the same regardless
  of where the product comes from originally

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Assumptions for simplicity

• 3. Lets assume that there are no built up roads,
• transportation of goods occurs as the crow flies
• transportation takes place by oxen-drawn carts

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Assumptions for simplicity

• 4. Lets assume that the quality of land is
  homogenous throughout the territory
• N.B. this is not a part of the original model,
  only of the visual interpretation!

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Implications of the assumptions

• Producers get a homogenous income for their
  produce sold on the market
• Their income will therefore depend on the average
  yield per hectare
• Their net revenue will be smaller, as we have to
  account for the costs of working the land and
  transportation to the markets.
• If the quality of land is homogenous all over the
  territory, the costs of working the land will be
  the same everywhere
• Transportation costs will be different each time

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Formulation of net income

• The net income per hectare of the producer will be

• where
• J is the income per hectare of a given product
• Q is the average yield of the product
• P is the price per given quantity of product
• K is the cost of working the land per quantity of
  product
• t is the transport cost per tonne-kilometre of
  product
• k is the distance of the product from the market

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The same again, graphically
Income (J)
Q (P K)

• The net profit will decrease as the distance from
  the market increases.

• We can see that there exists a point Z beyond
  which all income would be consumed by all
  expenses, so production stops beyond this point.

• Distance from market (k)

Z
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Further specificities of production

• We have to realise that production will not be
  restricted to a single product
• The quantity produced will depend on the demand
  on the market, as each will have its own Q (P
  K)
• Transport costs will also differ, as products
  will have a different typical mass and different
  physical properties
• bulk goods vs. liquid goods
• light goods with large volume vs. denser goods
• fragile goods vs. robust goods
• perishable goods vs. durable goods
• If transport costs increase, the maximum
  acceptable distance from a market decreases

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Zones of Production

• At any given point around the town, they will
  produce a product whose profitability at that
  point is highest.
• The limits of these zones are found at the point
  where the profitability of two products is equal.

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Zones of Production, graphically
Income (J)
I
II
III

• Distance from market (k)

Z
The City
Y
X
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What if? Shortage in Zones of Production

• If there is shortage of a product in the market,
  its demand will exceed its supply
• The price of the product will increase
• This will pull with it the profitability of the
  product
• To compensate for the excess in demand, more land
  will be brought into the production of this
  product
• This can only be done at the expense of other
  products
• Supply of other products will change too
• This will affect their prices too
• Equillibrium will be reached with a different
  product structure

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What if? Cheaper transportation appears

• If transportation technology develops, and a
  newer means of transport appears, this will have
  an effect on the zones too
• As per-unit transport costs drop, profitability
  remains the same!
• However, the decreased transport costs will
  expand the zones of production.

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Zones of Production, graphically
Income (J)
I
I
II
II
III
III

• Distance (k)

Z
The City
Y
X
X
Y
Z
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Zones of Production Geographically

• We have now graphically established the limits of
  the zones
• If we take the graph of the limits of the zones,
  and rotate it around the Y-axis, we will get a
  spatial representation of the zones

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Zones of Production Geographically
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So what do we produce and where?

• Von Thünen defined that certain goods will be
  produced at a particular distance from the market
• He deduced this zonal distribution
• Dairy and intensive agriculture
• Firewood and construction wood plantations
• Wheat production
• Free-range livestock production
• Forest (uncultivated)

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The Iceberg-model

• In von Thünens interpretation, the oxen drawing
  the carts to and from the market will consume
  part of the wheat load on the journey there and
  back (fuel)
• This can be considered as the associated
  transport cost, expressed as a fraction of the
  cargo
• Samuelson describes this as the Iceberg-model in
  1954
• The decrease in the cargo of wheat during the
  trip is similar to how an iceberg shrinks as it
  travels away from the poles
• A smaller quantity of product will arrive as was
  sent out
• This way, the model becomes more homogenous, and
  the effects on other markets can be ignored

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The interpretation of markets in the city

• Inner city functions
• Living
• Services
• Commerce

Land price

• Outer city functions
• Industry
• Transport logistics
• Storage

Agricultural functions

• Distance from city centre

Z
City Centre
Y
X
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Factors of the value of land

• Von Thünens model establishes the value of land
  by considering its proximity to the markets
• In reality, the value of land is composed of
  several factors
• Natural resources
• Soil quality
• Waters
• Climate and environment
• Accessibility
• Availability and quality of work force
• These are put in the framework of bid price by
  William Alonso

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Von Thünens model in commerce

• Factors for locating commerce within the city
• The quality and profitability of the goods sold
• The sensitivity of turnover to distance from city
  centre
• The demand of land of the commercial activity

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Von Thünens model in commerce
Revenues Profits
Luxury goods
Consumer goods
Groceries and day-to-day goods

• Distance from city centre

Z
City Centre
Y
X
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Alonsos model of living spaces

• City dwellers have the same income but different
  priorities
• They can choose between
• Smaller or larger properties
• Properties nearer to or further away from the
  centre
• More or less free time (depending on commuting)

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Alonsos model of living spaces

• The equation for this is

The utility function is , where

• h is the city land used
• r is the price of city land per square metre
• x is the quantity of other consumption
• p is the price level of other consumption
• T is the value of free time per hour
• t is the value of travel time per hour
• w is the wage level
• y0 is the non-wage income
• If prices r, p, and t are given, households will
  maximise their welfare accordingly.

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Alonsos model of Location and Land Use

• Supposition the aggregate income and utility
  function of households is the same
• All workplaces and all shopping outlets are in
  the city centre
• With the aggregate income given, one must choose
  between buying/renting a larger plot further away
  from the city, or a smaller one closer to the
• Therefore there exists a substitutive
  relationship between the benefits arising from a
  larger and more distant plot and the time and
  costs needed to travel to the city centre

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Relationship between land price and distance
Price of Land (p)
City limits

• Distance from city centre

City Centre
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Population density and rehabilitation
Population density
Distance from city centre and stages of urban
rehabilitation

• Distance from city centre

City Centre
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Third World megacities
Population density

• Distance from city centre

City Centre
Slums
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Choosing locations for services

• When locating production, the key aspects were
  weight and distance
• But services have no weight!
• Key aspects to consider
• Consumer travel time and expenses
• Range of available services
• Attractiveness of service provider
• The model to use is the Gravitational and
  Potential Model

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Gravitational and Potential Model

• Formula of Universal Gravitation

Formula of gravitational models
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Gravitational and Potential Model
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Regression curve of the model
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Gravitational and Potential Model

• Gravitational potential

Strength of gravitational field
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