D. Big and Small Cities
Economies of agglomeration
- firms produce at lower costs by locating near one
another => positive externality, external
economies of scale
1. Localization economies
- Cost of firms in a
particular industry decrease as the output of
the industry increases
a. Scale economies in
intermediate inputs
- Firms share an input
supplier, locate close to supplier,
results when:
(1) Input demand by a
single firm too small to exploit economies of
scale in the production of the intermediate
input
(2) Transportation
costs for the intermediate input are
relatively high
Ex. -
- High-technology
firms - electronic parts
- Publishers -
information (libraries, research
institutes, universities),
illustrations (graphic design firms)
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b. Sharing a labor pool
(1) Varying demand for
labor
(a) Impact on
workers
- Some firms
succeed, others fail
- Clusters make
transfers of workers easier:
i) Low job
search costs - other firms nearby,
informal networks
ii) Low moving
costs
Ex. -
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(b) Impact on firms
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(2) Matching
- Uncertainty about
required skills
Ex. -
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c. Knowledge spillovers
- Information and ideas
more easily exchanged
- Formal and informal
networks
2. Urbanization economies
- Cost decreases as the
output of the entire urban area increases
- Same reasons as
localization economies:
a. Intermediate inputs
Ex. -
.
b. Labor pooling
City employment more
stable, search and moving costs lower
c. Sharing information
- Diverse backgrounds,
interaction=> innovation
3. Incubation process
- Localization economies
provide nurturing environment to firms in
immature industry
- Product cycle theory
- firms develop in clusters early,
standardized products and production
processes lead to large-scale production,
firms leave for cheaper labor and land
Ex. - Radio,
computer
4. Differences in city size
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- Local employment -
jobs supported by local consumer spending,
wider variety in larger cities because demand
sufficient to realize economies of scale for
some products
5. Marketing - shopping
externalities
- Sales of one store
affected by the location of others.
a. Imperfect substitutes
- Goods similar but not
identical => comparison shopping
required
Ex. -
- Cluster of imperfect
substitutes decreases cost of comparison
shopping, attracts customers, boosts
demand
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b. Complementary goods
Purchased on same trip
- "one-stop shopping"
Ex. -
c. Urban forms
(1) Clusters - shopping
centers, malls, city centers
- Mix of substitutes
and complements
(2) Ribbons, strips,
corridors
- Cars favor strips
- less congestion
- Space intensive
stores - furniture, cars
- Problem with
deterioration, visual blight
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