Urban Economics

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Urban Economics

• Economics 153
• Pomona College
• www.economics.pomona.edu/lozano

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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.

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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.

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Punch line

• Cities will exist as long as the benefits
  associated with living in cities are greater than
  the costs.

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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.

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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.

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What are Economies of Scale?

• When a firm or industrys 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

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Definition of a City

• An area with relatively high population density
  that contains a set of closely related activities

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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.

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Relax Equal Productivity Assumption (1)

• Gains from trade due to differences in
  productivity.

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Relax Equal Productivity Assumption (2)

• Exchange at a rate of 2 shirts for one loaf

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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.

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Trading CitiesRelax 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.

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Factory CitiesRelax 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.

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Factory CitiesRelax 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

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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.

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What is Next Transportation Costs, learning in
cities and Industry Agglomeration

• Krugman (JEP, 2002)

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Quigley (1998) Diversity and Cities (Scale
Economies)