LOCATION

1
LOCATION
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Theories of Location

• Residential location or the location of people
• Location of firms

3

• The human race is, and has always been, a race of
  migrants
• evolved on the African savannahs and began
  walking out into Europe and Asia
• moved and settled and populated areas and then
  moved on to new areas.
• Some times we had to leave because of the
  environment, the weather, climate changes,
  economic conditions, persecution etc and
  sometimes we went because we wanted to .
• But for all those reasons combined, movement of
  people is a complex behavior with important
  regional ramifications.

4
Residential Location Theory

• Residential location theory or what is usually
  termed migration theory deals with people moving.

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Important Questions

• Why do people move? How much is economic,
  social, political, forced, etc.
• When do people move?
• When people migrate, what determines their
  destination?
• What sorts of formal and informal institutions
  arise because of migration?
• What is the effect of migration on the people who
  move?
• What is the effect of migration on the people
  left behind?
• What is the effect of migration on the place
  left?
• What is the effect of migration on people in the
  destination area?
• What is the effect of migration on the
  destination area?

6

• Now, beyond these questions are explanations
  dealing with interregional migration as distinct
  from international migration.
• There are of course, some obvious differences.
  
• International migration is more likely to
  involve language differences and higher costs of
  assimilation, as well as more political reasons
  and implications.
• But, it is my contention that the same theory
  should apply to both.

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Why do we care?

• We care because there are consequences to
  migration
• Consequences in the place of origin (some
  governments have actually developed laws to
  encourage out migration)
• These include Turkey, the Phillipines, South
  Korea, Pakistan, Bangladesh, Mexico and Sri
  Lanka.

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Why would a country want to encourage out
migration?

• IN some cases it is to help keep pace with their
  expanding labor force. Since their arent enough
  jobs at home, people are encouraged to go
• In some cases, like Egypt and India, the
  educational systems are producing far more highly
  educated workers than can be accommodated.
• Placing such workers in western industrialized
  countries also tends to produce large inflows of
  valuable hard currency for the country of origin.
• In some cases emigration is promoted specifically
  for selected ethnic groups or those that oppose
  the government of the origin country.

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• On the other hand there may be serious
  consequences of migration for the origin place
• Migration is highly selective and those who are
  most able to leave a declining area and most
  likely to find jobs in a growing destination area
  are also the most educated and skilled and this
  means there may be a serious brain drain.
• Additionally when many people leave an area and
  then suddenly return there can also be both
  positive and negative effects. Such cases occur
  in situation of political turmoil which comes to
  an end and refugees return.

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Consequences in the Destination Place

• Migration can alter ethnic, racial, cultural, and
  even political composition of the receiving area.
  This is not only true for international
  migration but also for interregional migration.
  Areas of Detroit, Chicago, New York, and St.
  Louis can all attest to racial changes
• And once international migrants get to a
  destination area, their internal migrations may
  also have such consequences-Nashville and Memphis
  are clear cases of such migration.
• Such sudden change may cause social conflict and
  even violence.

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There are also costs and benefits of migration
for social services and entitlement programs as
well as taxation systems and tax revenues

• Migrants cause pressure on health care systems,
  educational systems, public infrastructure, and
  social welfare.

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Regional Origins of Immigrants to the United
States, Selected YearsImmigrants (in thousands)
  Source Immigration and Naturalization
Service, 1998 Statistical Yearbook.
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Why do people move?

• People move in order to better them selves (that
  is for economic reasons)
• They also move because of fear of political or
  other repression or persecution
• Finally they move because they simply want to
  pursue some dream or see whats around the next
  corner

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push factors or pull factors

• Push factors are those circumstances that cause
  you to want to leave somewhere. It might be high
  unemployment or generally poor economic
  conditions, it might be a war or famine.
• Pull factors, on the other hand are those
  factors which tend to draw migrants to a specific
  place. Pull factors can include low
  unemployment, high wages, or a generally booming
  economy with lots of perceived opportunities,
  availability of land, availability of housing,
  lower crime rates or simply a more open society.
  

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Population change for a region comes from four
components

• Births
• Deaths
• In-migration
• Out-migration

The rate of expansion of population due to births
minus deaths is referred to as the natural rate
of population increase. The most difficult
components to predict, of course, are in and out-
migration. Regions find it difficult to regulate
migration at all, while countries with borders
which can be controlled to varying degrees are
more likely to try to control migration and
produce government policies for migration.
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Migration TheoryFirst we shall present a few of
the more well-known theories from other fields
and then we will move into the economic theories.

• Ravenstein
• Stouffer
• Lee
• Zelinsky
• Neoclassical economics
• The new economics of migration

• Dual labor market theory
• World systems theory
• Network theory
• Institutional theory
• Cumulative causation

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Ravenstein

• Ravenstein put forward what have been termed the
  Laws of Migration, in the 1880s, based on
  observation of patterns in Great Britain,
  supplemented by data from the United States
• most migrants travel short distances
• migration proceeds step by step
• longer distance migrants prefer to go to
  great centres of commerce or industry
• each stream of migration produces a
  counter_stream

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• urban dwellers are less migratory than people
  in rural areas
• females are more migratory than males in
  internal migration, but males are more common in
  international migration
• large towns owe more of their growth to
  migration than natural increase
• the volume of migration increases with the
  development of industry and commerce and as
  transport improves
• most migration is from the agricultural
  areas to centres of commerce and industry
• the main causes of migration are economic.

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Stouffer

• the level of movement between two places is
  dependent on the number of intervening
  opportunities between them
• Intervening opportunities are the nature and
  number of possible alternative migration
  destinations which may exist between place A
  (migration origin) and place B (migration
  destination).

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• the nature of places, rather than distance, is
  more important in determining where migrants go.
• People will move from place A to place B based on
  the real, or the perceived, opportunity at place
  B (e.g. work).
• the number of people moving over a given distance
  is directly proportional to the number of
  opportunities at that distance, and inversely
  proportional to the number of intervening
  opportunities.

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Lee

• Lee tried to explain the factors affecting
  migration in terms of the positive and negative
  characteristics of both the origin and
  destination.
• Migrants must expect to receive some added
  advantage in moving from one place to another.

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• potential movements from an origin ( such as a
  rural area) to a final destination (such as a
  city) are likely to be influenced by obstacles at
  either source or destination, or en route
• Such obstacles might include family pressures,
  misinformation, national policy, travel costs,
  lack of capital, illiteracy, military service and
  language.
• the same feature might be perceived differently
  by different individuals _ some might welcome the
  opportunity to live in a large city, with all the
  facilities it might offer, whereas others might
  find it cramped and depressing.

23
Zelinsky

• transition to patterns of migration just as there
  is for demographic change. In his model there are
  five stages
• (i) in a pre_industrial society there is little
  residential migration and limited movement
  between areas
• (ii) an early transitional stage of considerable
  rural_urban migration and the colonization of new
  lands, with the associated growth of longer
  distance migration (often in the form of
  emigration)

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• (iii) in the third stage, rural _ urban migration
  continues and there is a rapid rise in migration
  between cities
• (iv) rural _ urban migration may continue but at
  a markedly reduced rate residential migration
  remains high, but in the form of migration in and
  between cities rather than emigration. There may
  be some immigration of unskilled workers, and
  highly trained professional workers may be
  exchanged between countries as a result of the
  operations of multi_national companies

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• (v) Advanced societies will have almost
  exclusively inter_ or intra_ urban migration
  although new technology will reduce the need for
  migration and there will be less need for some
  types of circulation such as long_distance
  journeys_to_work. Mobility between and within
  countries may be affected by state legislation.

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Neoclassical economics

• macro theory)
• views geographic differences in the supply and
  demand for labor in origin and destination
  countries as the major factors driving individual
  migration decisions.
• Among the assumptions of this model are that
  international migration will not occur in the
  absence of these differentials, that their
  elimination will bring an end to international
  movements, and that labor markets (not other
  markets) are the primary mechanisms inducing
  movements.
• Government policy interventions affect migration
  by regulating or influencing labor markets in
  origin and destination countries.

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Neoclassical economics

• micro theory
• focuses on the level of individual rational
  actors who make decisions to migrate based upon a
  cost_benefit calculation that indicates a
  positive net return to movement.
• Human capital characteristics that raise the
  potential benefits of migration, and individual,
  social, or technological factors that lower
  costs, will lead to increased migration.
• Differences in earnings and employment rates are
  key variables, and governments influence
  migration through policies that affect these
  (e.g., through development policies that raise
  incomes at the point of origin, decrease the
  probability of employment at destination, or
  increase the costs of migration).

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Classical Model of labor migration

• Assumptions
• 1.Perfect competition exists in all markets
• 2.Production functions exhibit constant returns
  to scale.
• 3.Factor migration is costless and there are no
  other barriers to migration
• 4.Factor prices are perfectly flexible
• 5.Factors of production are homogeneous
• 6. Owners of labor and capital are completely
  informed about factor returns in all regions.

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• labor is hired at any given wage up to the point
  that the marginal revenue product is equal to the
  marginal factor cost (wage)
• the law of diminishing returns states that given
  some fixed input, as you add a variable input,
  you evenutally get tothe point the additional
  variable input yields diminishing average,
  marginal and total returns.
• given an equilibrium situation if we add labor we
  reduce the marginal revenue product of wages and
  will only hire more workers at a lower wage

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• If we lose workers then the mrp of remaining
  workers rise so that we pay higher wages.
• given the assumptions and these two truths, we
  can see how factor price convergence comes from
  migration. Assume we have some output to labor
  curve in two areas, and resulting supply and
  demand curves.
• This of course requires perfect information, lack
  of costs to move, and lack of other barriers to
  migration. Very limiting assumptions. Moreover,
  it ignores the differences between speculative
  migration and job-in-hand moves, it ignores the
  affect of amenities, psychological costs and
  benefits, the bandwagon effect (or beaten path
  effect) personal and family characteristics and
  the institutional framework in which migration
  takes place.

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The human capital model of migration (Sjaastad,
and cooke and Bailey)

•  Does not assume a timeless world with
  instantaneous responses.
• Migrant responds to higher earnings of his
  lifetime. Migrants exhibit positive time
  preferences. (Sooner is better than later) so we
  have to look at the present value
• Rijsum t1 to T of (Yjt-Yit)/(1d)raised to the
  t.
• Where Rij is the gross present value of the
  lifetime increment to earnings expected as a
  result of migration from i to j. T is the number
  of years of
• working life remaining, 1/(1d) to the t is the
  discount factor with d as the discount rate.
  Then PVR-C Better yet is the todaro model whcih
  looks at the same general model but uses
  probabitlites rather than levels.

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• Problems with these models are the lack of
  information
• Information location and assessment is crucial to
  understanding migration

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Migration is a function of

• characteristics of the origin area,
• characteristics of the destination area,
• difficulty of the journey,
• characteristics of the migrant.

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New Economics of Migration

• views migration as a family (i.e., group)
  strategy to diversify sources of income, minimize
  risks to the household, and overcome barriers to
  credit and capital.
• International migration is a means to compensate
  for the absence or failure of certain types of
  markets in developing countries, for example crop
  insurance markets, futures markets, unemployment
  insurance, or capital markets.
• Wage differentials are not seen as a necessary
  condition for international migration, and
  economic development in areas of origin or
  equalization of wage differentials will not
  necessarily reduce pressures for migration.
• Governments influence migration through their
  policies toward insurance, capital, and futures
  markets, and through income distribution policies
  that affect the relative deprivation of certain
  groups and thereby their propensity to migrate

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Dual labor market theory

• demand for low-level workers in more developed
  economies is the critical factor shaping
  international migration
• To avoid the structural inflation that would
  result from raising entry wages of native
  workers, and to maintain labor as a variable
  factor of production, employers seek low-wage
  migrant workers.

36
Dual labor market theory

• International migration is demand-based and
  initiated by recruitment policies of employers or
  governments in destination areas.
• Wage differentials between origin and destination
  areas are neither necessary nor sufficient
  conditions for migration.
• The options for government policy intervention to
  affect migration are limited__short of major
  changes in economic organization in destination
  areas.

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World systems theory

• Focuses not on labor markets in national
  economies, but on the structure of the world
  market -- notably the "penetration of capitalist
  economic relations into peripheral, noncapitalist
  societies," which takes place through the
  concerted actions of neocolonial governments,
  multinational firms, and national elites.

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• International migration is generated as land, raw
  materials, and labor in areas of origin are drawn
  into the world market economy and traditional
  systems are disrupted.
• The transport, communications, cultural and
  ideological links that accompany globalization
  further facilitate international migration. In
  this view, international migration is affected
  less by wage or employment differentials between
  countries than by policies toward overseas
  investments and toward the international flow of
  capital and goods.

39
Network theory

• migrant networks serve to reduce the costs and
  risks of international migration and thus to
  increase the likelihood of movement.
• The development of such networks are often
  facilitated by government policies toward family
  reunification and, once started, migrant networks
  can make international flows relatively
  insensitive to policy interventions.

40
Institutional theory

• once international migration has begun, private
  and voluntary organizations develop to support
  and sustain the movement of migrants.
• These include a variety of legal and illegal
  entities that provide transport, labor
  contracting, housing, legal and other services,
  many of which have proven difficult for
  governments to regulate.

41
Cumulative causation theory

• holds that, by altering the social context of
  subsequent migration decisions, the establishment
  of international migration streams creates
  "feedbacks" that make additional movements more
  likely.
• Among the factors affected by migration are the
  distribution of income and land the organization
  of agricultural production the values and
  cultural perceptions surrounding migration the
  regional distribution of human capital
• once a "migration system" has developed, it is
  often resistent to government policy intervention

42
Other Migration Concepts

• beaten path, counterstream effect (well beaten
  path eases travel in both directions), chain-
  migration (short moves in one direction forming a
  stream
• Lowery hypothesis, net out migration positively
  related to net inmigration,
• Beale hypothesis high gross out migration can be
  associated with either high net in or high net
  out migration (with Lowery effect dominating in
  prosperous an growing areas and the common sense
  (net out negatively realted to net in )
  dominantig in depressed areas.

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Location Decisions
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Who makes locations decisions when and why?

• The location unit is the entity which is at risk
  to being moved,
• whereas the location decision unit is the entity
  that makes the location decision for the location
  unit.
• These may be different.

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The primary questions to be answered by the
location unit are

• When should a location decision be made?
• What constitutes a good location?
• What factors are important to a good decision?

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Businesses care about location decisions

• because it costs something to move
• a new location can drastically affect overall
  returns for the business.

47
In the United States over 250 billion dollars
are spent annually on the construction of new
facilities. It is estimated that depending on the
application 20 to 80 per cent of a facility's
total operating cost is spent on material
handling within facilities. Proper location and
design of facilities can potentially result in
savings of 5 to 50 percent of operating costs.
Apart from the magnitude of costs involved in
facilities, the frequency with which facility
location and layout decisions are made is also
important. It is estimated that the layout of
most facilities is modified approximately every 2
to 5 years. This continual change is required to
keep pace with changes in demand, new product
introductions, product phase-outs, process
changes, improved tooling and technology, new
legislation etc. As such most industrial
engineers and often many other engineers are
involved several times in their career in layout
or location decisions.
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When is a location decision made? Only at
critical junctures of the firms life.

• Birth, when the initial location must be chosen
• When expansion capacity is required
• When a new process or line of output is
  introduced
• When there has been a major change in
  transportation rates

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• When the composition of output changes
• When there is a major change in input
  requirements
• When there is a shift in markets
• When there is a change in supplier locations
• Or some combination of the above.
• A location decision evaluation assumes something
  is wrong with the current location.

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Business Location Factors

• strongest location factor is inertia.
• The supply (including availability, price, and
  quality) of local or nontransferable inputs.
  Nontransferable or local inputs are those inputs
  which are present at a location and which cannot
  realistically be moved. Examples Land, climate,
  water quality soil composition amenities.

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• The ability to dispose of nontransferable outputs
  in the local area. Nontransferable outputs ore
  outputs which have to be disposed of locally and
  are not realistically transferable elsewhere.
  Examples include air and water pollution and
  other waste (some is indeed transferable).
• Transferable inputs (those input factors which
  are relatively easily moved to a given location
  from their origin. This includes things like
  fuel, materials, and some services and
  increasingly, information.

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• Outside demand for transferable outputs. This is
  really the availability of the market for the
  output of the business and reflects the relevant
  transfer costs.

53
The Four Classical Traditions in Location Theory

• Land Use Von Thunen/Alonso
• Industrial Location (Process Orientation)
  Weber/Smith/Isard/Moses
• Central Places/Market Areas- Christaller/Losch
• Spatial Competion - Hotelling

54
Location Theory

• Firms and households can be thought of as
  optimizers.
• Households make decisions to maximize their own
  utility.
• Firms make decisions to maximize profits, or
  minimize costs.
• This applies to locational choices as well.
• We have looked at this in regards to regional
  location.
• We now turn to locational choices within urban
  areas.

55
The Von Thunen Model

• Von Thunen first discussed the issue of
  locational choice in the context of an
  agricultural land use model.
• We will extend this model to investigate
  locational choice of firms and households in
  urban areas.
• We will get a better understandings of economic
  forces operating within urban areas.

56
Assumptions

• Assume that farmers produce output, q.
• Productivity per acre is constant at q.
• Markets for inputs and outputs are competitive.
• There are constant nonland inputs per acre, C.
• There are linear transportation costs to the
  market.
• There is no congestion.
• Cost per lb per mile is constant at t.
• Rents per acre are R.

57
Profit Function per acre

• ?pq-C-tqu - R
• Access to the market reduces transport costs.
• Competition for land would increase the price of
  land.
• This is known as the bid-rent.
• Competition for land would drive out all profits.

58
The Von Thunen Model

• Von Thunen first discussed the issue of
  locational choice in the context of an
  agricultural land use model.
• We will extend this model to investigate
  locational choice of firms and households in
  urban areas.
• We will get a better understandings of economic
  forces operating within urban areas.

59
Assumptions

• Assume that farmers produce output, q.
• Productivity per acre is constant at q.
• Markets for inputs and outputs are competitive.
• There are constant nonland inputs per acre, C.
• There are linear transportation costs to the
  market.
• There is no congestion.
• Cost per lb per mile is constant at t.
• Rents per acre are R.

60
Profit Function per acre

• ?pq-C-tqu - R
• Access to the market reduces transport costs.
• Competition for land would increase the price of
  land.
• This is known as the bid-rent.
• Competition for land would drive out all profits.

61
Bid Rent Function

• Set profits equal to zero, and solve for R.
• ?pq-C-tqu - R0
• Rpq-C - tqu
• Plot this in R-u space
• Intercept pq-C
• Slope dR/du-tq

62
Bid-Rent Function

R(u)
Profits are zero
distance to market (u)
63
Model of Land Use

u1
u2
A
B
64
Generalizing the Model

• Apply to land use patterns in cities.
• Develop for firms
• Develop for households
• Start with simple model, and then add realism.
• Amenities and disamenities
• Fiscal factors

65
Standard Urban Location Model

• We will evaluate both firm and household location
  models
• Firms Choose location within city to maximize
  profits.
• Generates a land rent function.
• Households Choose location within city to
  maximize utility.
• Generates a housing price function, and an
  underlying land-rent function.
• Look at firms first and then households.

66
Simplistic City Assumptions

• Look at a turn of the century city
• Characteristics
• Monocentric with central export node.
• Horse-drawn wagons to node for manuf.
• Workers/shoppers commute using streetcars (hub
  spoke system).
• Agglomeration economies exist for office industry.

67
Manufacturers location

• Attraction to city proximity to export node.
• Produce output B with K,L,T, other inputs.
• Prices constant at PB.
• Input and output markets competitive.
• Cost of K,L constant at C.
• Expenditure on land is RT
• Substitution possible.
• Transport prices are constant/ton/mile, t.
• Distance is u
• Look at profit function.

68
Bid-Rent for Manufacturing

• Look at the profit function
• ? PBB - C - tBu - RT
• Competition for space drives out all profits.
• ?? PBB - C - tBu - RT0
• Solve for R (PBB - C - tBu)/T
• ?R/ ?u -tB/T
• Since t,B, T are positive, this is negatively
  sloped.

69
Convexity of Bid-Rent Curve

• Simple Von Thunen model did not allow
  substitution, and this lead to constant slope
  function.
• Here do allow substitutablity. Look at effect on
  slope
• ?R/ ?u -tB/T
• (slope at a point, so T cannot vary at that
  point)
• Now treat T usage as dependent on distance.
• ?2R/?u2 ?T/?u(tB)/T2
• Since ?T/?ugt0, then ?2R/?u2gt0

70
Zero Profit Bid Rent Curve

• R

Slope of Bid-Rent ?R/ ?u -tB/T Locational
equilibrium ?RT -tB?u
(PBB - C)/T
Bid Rent
u
71
Office Firms

• Attraction agglomeration economies.
• Consultations (A) with clients take place in CBD.
• Travel is by foot since they cannot rely on
  public transport system (too irregular).
• Produce output A with K,L,T, and other inputs.
• Prices constant at PA.
• Input and output markets competitive.
• Cost of K,L constant at C.
• Expenditure on land is RT
• Substitution possible.
• Transport prices per consultation are constant at
  mW.
• mminutes, Wwage/minute, Distance is u.
• Look at profit function

72
Bid-Rent for Office Firms

• Look at the profit function
• ? PAA - C - mWAu - RT
• Competition for space drives out all profits.
• ?? PAA - C - mWAu - RT0
• Solve for R (PAA - C - mWAu)/T
• ?R/ ?u -mAW/T
• Since m,W,A, and T are positive, this is
  negatively sloped.

73
Zero Profit Bid Rent Curve

• R

Slope of Bid-Rent ?R/ ?u -mWA/T Locational
Equilib (?R)T -mWA?u
(PAA - C)/T
Bid Rent
u
74
Which is Steeper?

• Since Wm for office firms, is likely greater
  than tu.
• On the other hand the ability to substitute away
  from land is more difficult for manufacturing.
  Thus, T is likely greater in the manuf. sector.
• Thus, bid-rent for office is steeper.

75
Zero Profit Bid Rent Curve

• R

Land rent function is outer envelope.
Manuf. Bid Rent
Office Bid Rent
u
76
Retail firms

• Attraction is because hub of streetcar system
  drops them in CBD.
• Their markets are related to the density of their
  demand, the scale economies associated with
  production, and transportation costs.
• Central Place theory determines market size.
• Firms carve up the city into submarkets.

77
What determines WTP for Land?

• Customers come to the firm to buy goods.
• Profit Function ?G(PG-ACG)
• where Gvolume of goods, Pprice, ACavg. cost.
• If P-AC is constant, then profit max. at max G.
• This is maximized at the center.
• Conclusion
• Willingness to pay for land depends on
  accessibility of land to customers, and thus it
  increases with access to CBD.
• These bid rents vary by firm.

78
Zero Profit Bid Rent Curve

• R

Land rent function is outer envelope.
Manuf. Bid Rent
Office and Retail Bid Rent
u
79
Land Use Patterns

Office Retail
O
Manuf.
80
Residential Location Models

• Households choose locations to maximize utility.
• Household characteristics
• Households choose between Housing (H) and other
  goods (X), thus V(X,H) (identical tastes)
• Households work in the CBD
• Assume away decentralized employment.
• Income is constant at W.
• Commuting costs per mile are constant at t.
• Look at optimization problem

81
Constrained Optimization

• LV(X,H)?(I-PXX-PHH-tu)
• We will look at the First Order Condition with
  respect to u
• ?L/ ?u -????PH/?uH - t) 0
• What does binding constraint imply?
• Thus, ?PH/?uH - t 0 or ?PH/?u- t/H
• In addition, given substitutability, this is
  convex since ?2PH/?u2(t?H/?u)/H2gt0

82
Bid Housing Price Function

• P

Slope ?PH/?u -t/H Locational
Equilibium ?PHH -t ?u
Bid Rent
u
83
Family of Bid Functions
Utility falls as we move to higher bid
functions. Why? Which is most
relevant? Related to S and D for
labor.

• P

u
84
From Bid Housing Price to Housing Price Gradient

• Slope ?PH/?u -t/H
• The housing price gradient is simply the percent
  change in housing prices brought about by a unit
  change in distance.
• Divide the numerator by PH to get
• (?PH/PH)/?u -t/(HPH)
• What does this mean?

85
From Bid Housing Price to Bid Rent

• Demand for land by households is derived from the
  demand for housing.
• Thus, the bid housing price function generates a
  bid-rent function.
• Book shows this using revenue cost function
• profitP(u)Q - K-R(u)T
• R(u)(P(u)Q - K)/T
• where P(u) is price per square foot of housing,
  Qnumber of square feet, Knonland inputs, Tland
  inputs.

86
Derivation of Bid Rent

K
P(u)Q
u
R
87
Rent-Gradient and Housing Price Gradient

• Since the demand for land is derived from the
  demand for housing, the gradients are also
  related.
• (?R/R)/?u1/landshare(?PH/PH)/?u
• Land share Rent exp./Housing exp.
• If land share is say 0.1, which is steeper?
• Land Rent gradient is steeper.

88
Land Use Patterns in the Monocentric Model

Office Retail
O
Manuf.
Households
Why are households at most distant location?
89
Does SUM say anything about Population Density?

• Density falls as consumption of housing
  increases.
• H decreases as u decreases for two reasons.
• Builders substitute away from land as R
  increases.
• Households substitute away from housing as PH
  increases.

90
Summary

• SUM predicts
• Downward sloping, and convex rent gradient.
• Downward sloping, and convex housing price
  gradient.
• Steeper rent gradient than housing price
  gradient.
• Declining density.
• Accessibility matters to households.
• Rings of activity in Monocentric city
• Lets look at some empirical evidence

91
Rent Gradient Evidence

• There is not a lot of evidence here since land
  rent is not typically observed. That is, there
  are few transactions on undeveloped land.
• Mills shows that rent gradients are downward
  sloping, and have been falling over time.
• Chicago, 1928, rents fall about 20/mi.
• Chicago, 1960, rents fall about 11.5/mi.

92
Housing Price Gradient

• Evidence from Jerry Jackson
• Some support here.
• Housing prices fall by approximately 2.5
  per/mile.
• More later!

93
Land Rent vs. Housing Price Gradient

• If land rent share is 0.1 to 0.2, then we get the
  following prediction on rent gradient
• (?R/R)/?u1/LS(?PH/PH)/?u
• LS0.1 implies (?R/R)/?u1/0.12.525/mi.
• LS0.2 implies (?R/R)/?u1/0.22.512.5/mi.
• Thus, some support here.

94
Declining Population Density

• There is substantial evidence here.
• McDonald(1989, Journal of Urban Economics) has a
  lengthy review article on this evidence.
• Next time, I will briefly review this article

95
Does Accessibility Matter?

• Jackson article suggest that the answer is yes.
• However, Bruce Hamilton published an influential
  article in 1982 (JPE) that cast doubt on the
  predictability of the SUM.
• Measured wasteful commuting, by looking at pop.
  and employment density functions for cities.
• He found that there was 8 times more commuting
  taking place than could be explained by SUM.

96
Also Add other Realism

• Add in amenities/disamenities
• Add in fiscal factors

97
Weber/Losch/Isard/Smith

• Theories of plant location

98
Theories of Plant Location

• Median Location Principle
• Linear Market Competition
• Webers Theory of Location
• Loschs Economic of Location
• Isards Space Economy
• Smiths Spatial Margins

99
Webers Theory of Location

• Alfred Weber, German, 1909
• General theory applicable to any economic,
  political or cultural system.
• Minimum cost location
• Three factors
• Transport costs
• Labor costs
• Agglomeration

100
Webers Theory of Location

• Assumptions
• Isotropic plain uniform topography, climate,
  technology, and economic system.
• One finished product with one market
• Fixed location of raw materials and market site
• Labor is fixed, but available in unlimited
  quantities at production site
• Transport costs are a function of weight and
  distance

101
Webers Theory of Location

• Definitions
• Ubiquities materials available everywhere at the
  same cost
• Localized materials available at specific
  locations only
• Pure materials no weight loss during
  manufacturing
• Weight-losing materials portion of product is
  being used, resulting in a waste component

102
Webers Theory of Location

• Transport costs
• Single market and single source
• Ubiquitous material results in location at the
  market
• Pure material allows processing at market,
  source, or an intermediate location
• Weight-losing material will be processed at the
  source to avoid transporting waste material

103
Webers Theory of Location

• Transport costs
• One market and two sources
• Equal distance and shipping costs dictates a
  market location
• Two weight-losing materials results in an
  intermediate location

104
Webers Theory of Location

• Webers theory results in 3 generalizations
• Using pure materials in the production process
  will always dictate a market location
• Weight-loss materials usage will pull the plant
  closer to the sources
• Intermediate location chosen most often
• No handling costs at terminal

105
Webers Theory of Location

• Labor Costs
• Location chosen always has least combined costs
• A location my have higher transport costs, but
  more inexpensive labor
• Isotims lines of equal transport cost
• Isodapane line of total transport costs (sum of
  isotims)

106
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107
Webers Theory of Location

• Agglomeration
• Weber recognized that clustering will result in a
  per unit savings
• Example

108
Webers Theory of Location

• General theory
• No geographic variation in market demand
• No terminal costs
• Transport costs are becoming less of a factor
• Labor is mobile and does not exist in unlimited
  quantities
• Plants often produce a variety of outputs for
  many markets

109
Review

• What is the median location principle? Draw it!
• What is the concept of linear competition? Draw
  it!
• What is Webers theory of location?
• What are the three factors?
• What are the assumptions?
• Expand on the three factors!
• Drawbacks of the theory?

110
Isards Space Economy

• General theory of location by integrating von
  Thunen, Weber and Losch
• Based on substitution principle
• The substitution of one thing for another
• Ex capital can be substituted for labor
• Ex substitution of transport costs

111
Location T to M1 2 miles M2 7 miles
Location S to M1 4 miles M2 5 miles
If we were to plot these as coordinates, this is
the result
Movement along the line will demonstrate the
substitution of distances (or more appropriately,
transport costs
112
Smiths Spatial Margins

• Simplified real world conditions
• Profit motive
• Processing costs vary
• Most profitable location is where total revenues
  exceed total costs by the greatest amount

113
Total cost line or space-cost curve
Total revenue
Spatial margins to profitability
A Weber, revenues are equal everywhere B Losch,
variable revenue, but equal cost C Integration
of theories
114
Webbers Uncertainty Effect

• All firms share in uncertainty
• More realistic
• Greater uncertainties results lower investment of
  capital
• Uncertainty increases with greater separation
  from the market
• Satisficing rather than optimizing

115
Manufacturing Regional Patterns and Problems

• Patterns
• Evenly spaced or random
• Evenly distributed or linear
• Maybe random
• How do we address these patterns and apply logic
  to their spatial arrangement?

116
Importance of Manufacturing

• Manufacturing activities are being displaced by
  service sector activities and high tech industry
• Why?
• Financial and consulting services
• Increases in consumer income
• Increases in public sector employment
• Research and development
• Advertising and promotion
• Can this sustain economic growth?

117
High Tech Industry

• Research and Development
• Are these services replacing manufacturing or are
  they complimentary?
• Locate near metropolitan regions due to large
  technical labor force
• What happens if there is a shift in resources
  dedicated to manufacturing?
• Regional economic growth will decline
• Results in less expenditures for research and
  development
• Loss of future opportunities

118
Regional Patterns and Processes

• Cycle Theory
• Industrial regions progress through a sequence of
  stages over time
• Regions do not change at a consistent rate
• Regions do not follow the sequence
• Regional Cycle Theory
• Youth
• Maturity
• Old Age

119

• Regional Cycle Theory
• Youth
• Experimentation and rapid growth
• High levels of investment
• Recognition of cost-saving locations
• New technology spurs more growth
• Competitive advantage (low production cost, large
  geographic market)
• Maturity
• Dominance exerted over other regions
• Competition increases among regions
• Branch plants located in other markets
• Small loss of employees to branch plants
• Maintain locational cost advantage
• Old Age
• Market shifts
• Cheaper raw materials
• Labor cheaper elsewhere
• Taxes, competitive land uses
• Employees leave for higher paying jobs

120

• Regional Examples
• New England
• Grew through the industrial revolution
• Can anyone think of any smaller, local examples?

121
Manufacturing w/i the Urban System

• Large cities are most attractive
• Large markets
• Better access to surrounding regions and markets
• Access to national market
• Transportation connections (interstate, railway,
  air links)
• Large pools of skilled labor
• Convenient business services (warehousing,
  communication links)

122
Manufacturing w/i the Urban System

• Smaller cities are advantageous
• Lower cost of labor
• Manufacturing will be focused on processing raw
  materials
• Remember weight losing materials?
• Perishable food items
• Reflects the type of economy
• Mining, agricultural, forestry

123
Diffusion of Manufacturing

• Rate and direction of change
• Diffusions occurs from a point or points
• Spreads the fastest where there are no barriers
• Physical
• Cultural
• Political

124
Manufacturing Regions

• American Manufacturing Belt / Rustbelt
• New York City leading in manufacturing
• Chicago second
• Regional concentrations
• New England District
• New York and the Middle Atlantic
• Central New York and Mohawk Valley
• Pittsburgh-Cleveland-Lake Erie
• Western Great Lakes
• St. Lawrence Valley and Ontario District

125
Manufacturing Regions

• New England District
• Oldest of the regions in the Northeast
• Clothing and textile industry originally
• Today its focus is electronic products,
  electrical machinery and fabricated metal
• Skilled labor pool from prestigious universities

126
Manufacturing Regions

• New York and Middle Atlantic
• Centered on NYC
• Access to Intl. ports
• Fortune 500 companies
• International and national trade opportunities
• Financial, communications, and media
• Apparel, iron and steel, chemicals, machinery
• Publishing industry

127
Manufacturing Regions

• Central NY and Mohawk Valley
• Electrical machinery, chemicals, optical
  equipment
• Erie Canal and Hudson River
• Access to Atlantic and Great Lakes
• Niagara hydro-electric plant

128
Manufacturing Regions

• Pittsburgh-Cleveland-Lake Erie
• Oldest steel producing region in North America
• Centered on Western Pennsylvania and Eastern Ohio
• Electrical equipment, machinery, machine tools
• St. Lawrence Valley and Ontario
• Most populated
• Abundance of skilled labor
• Iron and steel, pulp and paper, processed food

129
Manufacturing Regions

• Western Great Lakes
• Detroit automobile manufacturing
• Chicago railcars, tractors, implements, food
  processing
• Milwaukee iron and steel, fabricated metals,
  machinery, printing
• Popular distribution point because of transport
  connections

130
Manufacturing Regions

• Other regions in the US
• Gulf Coast
• Texas to Florida panhandle
• Chemicals, petroleum industry
• Southeastern
• Textiles, aluminum, lumber, transportation
  equipment
• West Coast
• Aerospace and aircraft industry
• Electrical components, ships, machinery
• Silicon Valley
• Pacific Northwest
• Aircraft, lumber, processed foods

131
Manufacturing Regions

• Growth in population and economies occurs in the
  Sunbelt after WWII
• Sunbelt southern and western US
• Climate
• Market shifts
• Labor cost locations
• Tax advantages/breaks
• California and Florida experience population
  booms
• Development of urban fringe
• 1977 to 1982, 13 to 20 increase in
  manufacturing in many western states
• Regardless, NYC increased of jobs, why?

132

133
Median Location Principle

• Assumptions
• Production costs do not vary
• Delivery costs may vary
• Seek a location with minimal delivery costs
• Becomes location of maximum profit
• Example

Two possible median locations
134
Linear Market Competition

• Assumptions
• Two manufacturers
• Same production costs
• Uniform demand
• Example

135

Infrastructures
Users
Modes
Transportation
Spatial imprint
Urban Form
136
Introduction and Motivation

• Several examples of strategic interaction are
  used to set the stage.
• Strategic situations are ubiquitous.
• Individual interests are rarely either completely
  identical or perfectly opposed.
• Readings Dutta, chapter 1. McMillan, chapters
  1, 2 3.

137
Game Theory Background

• In war the will is directed at an animate object
  that reacts. --Karl von Clausewitz
• Environment includes other individuals and there
  is uncertainty about how they will act (or
  react).
• We can resolve some of this uncertainty if we
  assume that people act in a manner which is
  consistent with the achievement of their own
  goals.

138
Game Theory -- Definitions

• Study of rational behavior in situations
  involving interdependence. (McMillan)
• rational - actions are consistent with goals not
  consistently making the same mistake.
• Interdependence - any player is affected by what
  others do actions must depend upon prediction of
  others responses.
• A formal way to analyze interaction among a group
  of rational agents who behave strategically.
  (Dutta)
• Strategic behavior - Each player accounts for
  interdependence

139
Interdependence

• In order to decide what to do, you must determine
  how others are going to act (or react).
• This requires a knowledge of
• others aims (where they believe their interests
  lie), and
• the options available to them.
• What action will some player choose?
• Complicated by the fact that the best action will
  typically depend upon what others do.
• How is one to guess what others choices will be?
  

140
Why do economists care?

• The typical problems of economic behavior are
  strictly identical with the mathematical notions
  of suitable games of strategy. Von Neumann
  Morgenstern
• Examples
• Buyer and seller negotiating over a price
• Employer and employee interaction (negotiation,
  creating incentives)
• Firm and its competitors
• Firm and potential competitors
• Auctioneer and bidders
• (and the list goes on)

141
Applications outside Economics

• Presidential candidates
• Congress and the President
• Opposing generals at War
• King Lear and his daughters (strategic bequests)
• Contests in the animal kingdom
• Strategic voting
• and the list goes on

142
Examples of strategic situations

• Several examples are used to set the stage. These
  are used to introduce important themes for the
  semester. I expect you to be familiar with the
  details of each example, as well as with the
  strategic principles they illustrate.
• Two firms competing over sales
• Time and Newsweek must decide upon the cover
  story to run in some given week.
• The big stories of the week are a presidential
  scandal (labeled M) and a proposal to deploy US
  forces in the Balkans (labeled K).

143
Example (simultaneous move)

• Time and Newsweek (continued)
• Each magazines sales depend upon both cover
  stories.
• When deciding on a cover, neither knows which
  story the other magazine will choose to run.
• Heres a convenient way to organize the sales
  information

144
Example (simultaneous moves)

• This is called a simultaneous move game (even
  though choices need not be made at the same
  instant in time!)
• What stories will the two magazines choose to
  run?
• What would you choose (as the editor of Time)?
• How do your answers change if the sales figures
  are as follows

145
Example (sequential moves)

• Interaction between a firm and a potential
  competitor.
• F is a monopoly and G is a potential entrant.(F
  is the only barber in Seville, G is thinking of
  getting into the business) .
• G gets to move first and must decide whether to
  stay out (O) or to enter (E) the market. If he
  chooses to enter, then F gets to move and his
  choices are to either start a price war (W) or to
  accommodate (A) entry.
• We will call this a game with sequential moves.

146
Example - continued

• This information (including the order of moves)
  can be conveniently organized using a
  tree
• What should G do? What is the outcome likely to
  be?(Hint G can try and predict what F will do
  in case he were to enter.)

147
Example (continued)

• The example of the barbers also raises the
  question of threats and their credibility F
  would like to persuade G to stay out of the
  market. In the event that G enters, he threatens
  to shave his patrons for free.
• Should (will) G believe this?
• What can F do to make such a threat likely to be
  credible?

148
Prisoners Dilemma

• Story is familiar (payoffs are prison
  terms)
• Individually best strategies lead to an outcome
  that is inefficient (there are feasible outcomes
  which are jointly preferred).
• Not a game of pure conflict (opportunities for
  cooperation)

149
Prisoners dilemma (continued)

• Applications
• Arms Control Two countries, each likes best the
  situation where they have a huge arsenal while
  their adversary does not. Disarming while the
  other keeps its weapons is the worst outcome.
  When both are armed, neither has a tactical
  superiority over the other and they jointly
  prefer the outcome where neither has a stockpile
  of weapons.
• Stability of cartels
• How can small armies of tyrannical dictators
  control large populations? Coordinated action
  would have a good chance of success. Difficulties
  in obtaining outcomes that involve coordination.
• Several other examples (see Question 4 of
  Homework 1)

150
Negotiation with a deadline

• The case of Mortimer and Hotspur (in the way of
  a bargain, mark you me, Ill cavil on the ninth
  part of a hair) McMillan, p.16
• Mortimer and Hotspur are to divide 100 between
  themselves. Each of the bargainers knows that the
  game has the following structure
• Stage 1 Mortimer proposes how much of the 100
  he gets. Then either Hotspur accepts it, in which
  case the game ends and Hotspur receives the
  remainder of the 100 or Hotspur rejects it, in
  which case the game continues.
• Stage 2 The sum to be divided has now shrunk to
  90. Hotspur makes a proposal for his share of
  the 90. Then Mortimer either accepts it and gets
  the remainder or rejects it, in which case each
  receives nothing and the game ends.
• What will Mortimer demand at the first stage?

151
Mortimer and Hotspur (continued)

• Analysis - McMillan, p. 17. (In what ways is this
  game similar to the example of the two barbers
  above?)
• Suppose we modify the game so that it ends after
  stage 1 (only, if Hotspur rejects the offer the
  game ends with neither player receiving
  anything). What happens now?
• The value of a take it or leave it offer.
• Credibility issue that you will indeed walk away
  from any counteroffer.
• Achieving commitment.
• Pride, pique, and irrationality cannot be ignored

152
Location, Location,

• Our cities become uneconomically large and
  business districts within them are too
  concentrated. Methodist and Presbyterian churches
  are too alike cider is too homogeneous. --
  Harold Hotelling (1929)
• presidential candidates take similar centrist
  positions, television networks target their
  programs at bland middle of the road tastes,
• A version of the location game is in McMillan, p.
  15
• Two beer vendors operate on a beach. They are
  required to charge the same price, but they can