URBAN ECONOMICS

1. Conditions leading to a non-urban (rural) situation

a. All factors of production (land, labor, capital) have equal productivity

b. Constant returns to scale in exchange

c. Constant returns to scale in production

d. No advantage (utility) being near others

=> No advantage from trade or centralized production => population uniformly distributed (backyard production)

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2. Trading cities

a.  Comparative advantage

• Some factors of production better than others

Ex. - Soil conditions, climate, minerals, water, labor quality

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• Areas have comparative advantages - lower opportunity costs

Ex. -

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• North has a comparative advantage in shoe production, South has a comparative advantage in milk production

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b.  Development of trading cities

(1)  Regions will specialize and engage in trade if gains from specialization outweigh transportation costs

- North spends one hour less on milk (-2 milk) and one more on shoes (+12 shoes)

- South spends two hours more on milk (+2 milk) and two less on shoes (-2 shoe)

- Suppose terms of trade are 1 milk = 3 shoes

- South trades two milk for 6 shoes

- Gains from trade = 6 shoes for North and 4 shoes for South

- Trade will occur if transportation is less than 0.5 hour for North and 4 hours for South

Ex. - Trade cost 0.25 hours

- Gains from trade for North = 6 - (12 * 0.25) = 3

- Gains from trade for South = 4 - (1 * 0.25) = 3.75

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(2)  Trading cities will develop if there are economies of scale in transportation - lower average cost if more volume shipped

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(a)  Reasons for economies of scale

i)  Indivisible inputs - input can't be reduced below a certain level

Ex.  Wagons, trucks, boats

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ii)  Labor specialization - larger firms can assign workers specialized tasks, leading to higher productivity

Ex. - Drivers, ship crews, cargo loaders

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Ex. - Trade cost 0.10 shoes

- Gains from trade for North = 6 - 0.10 = 5.90

- Gains from trade for South = 4 - 0.10 = 3.90

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(b)  City development

• Trading firms form to take advantage of economies of scale in transportation

• Locate at crossroads, ports, river junctions

- Transshipment point - point where a good is transferred from one transport mode to another

• Employees locate near firms, bid up price of land

• Residents economize on land, density increases

• Trading city is formed

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c. Historical notes

(1) Early trading cities - Athens, Carthage, Timbuktu

(2) Mercantile cities - more centralized power, long-distance trade

• Key European cities - Constantinople, Venice, Genoa, Pisa, London, Paris, Rome, Lisbon, Antwerp, Amsterdam

(3) Largest early cities in the U.S. were ports - New York, Philadelphia, Baltimore, Boston, New Orleans

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3. Industrial cities (factory towns)

• Early manufacturing occurred at small scale - artisans and craftsmen, families, apprentices working in a small shop, lived above or behind shop

• Scale of manufacturing increased due to economies of scale in production - average cost decreases as volume increases

a. Price of products

• Average  labor cost = w / q

- Suppose wage in agriculture is 1 hour = 1 gallon of milk

- Wage should be the same for factory workers

- Must be compensate for higher cost of living in a city

Ex. - 0.80 gallons per hour

- Suppose q = 10

- Average cost of labor = 1.80 / 10 = 0.18 gallons per hour

- Suppose capital costs are 1.20 gallons per hour

- Average capital cost = 1.20 / 10 = 0.12 gallons per hour

- Average total cost = 0.18 + 0.12 = 0.30 gallons per hour

• Equals factory price in competitive market

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b.  Market area of a factory

• p (x) = p' + t * x

- p(x) = net price

- p' = factory price

- t = round trip travel cost, including opportunity cost of time

- x = distance from household to factory

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• Market area (and factory) is larger if scale economies increase and/or transportation costs decrease

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c. Industrial cities will develop if:

(1) Agricultural surplus is large enough to feed factory workers

(2) Economies of scale are large relative to transportation costs, enough to underprice home production

(3) Wage is high enough to attract workers to work in factories

(4) Workers cluster around factories, bid up price of land, density increases, city forms

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d. Historical notes

(1) Initial cities were defensive and/or religious in nature

• Economies of scale in defense and religion

• Labor specialization also involved

Ex. - California mission cities

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(2) Industrial Revolution

• Key developments:

(a) Innovations in agriculture - machines (plows, reapers), science

• Increased food production, fewer workers required - surplus agricultural workers migrated to urban areas, increased immigration to U.S.

• Provided labor for factories

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(b) Interchangeable parts and assembly line - more efficient than individual production

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(c) Inventions and innovations in specific industries - textiles (power loom), clothing (sewing machine), iron and steel (Bessemer process)

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(d) Energy technology - water power, electricity

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(e) Intercity transportation - turnpikes, canals, steamboats, railroads

• Cost of raw materials reduced, size of market increased

•  Larger scale of production could be accommodated

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(e) Construction methods - steel frame construction, elevator

• Allowed increased height and density (skyscrapers)

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(f) Intraurban transportation - streetcar

• Allowed cities to become bigger in area

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(3) Industrial cities became prominent in the U.S. during the Industrial Revolution - Chicago, Cleveland, Detroit, Pittsburgh

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(4)  England the European leader of the Industrial Revolution - Manchester, Birmingham, Liverpool, Glasgow

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