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Lectures on Urban Economics Chapter 1: Why Ci8es Exist

Jan Brueckner

Jan Brueckner/Lectures on Urban Economics © MIT Press 2011

Possible Explana8ons for Ci8es

•  Defense (military) •  Social interac8ons (sociological) •  Near jobs (economic) •  Jobs are concentrated because of: – Scale economies (internal to the firm -‐ larger enterprises are more efficient)

– Agglomera8on economies (external to the firm) – Transporta8on costs


Main Concepts

•  Scale economies •  Agglomera8on economies -‐ clustering of firms and households

•  Externali8es -‐ e.g., conges8on •  Transporta8on costs •  Sor8ng

Basket Weaving on Island Economy

•  Ubiquitous input (reeds) •  Scale economy due to division of labor (pin factory example)


Figure 1.1 Scale economies


Tangent line at LB

Tangent line at LA

Scale Economies •  Scale economies can be approached from two equivalent

direc8ons –  The behavior of produc'vity as scale (size) increases –  The behavior of cost as scale (size) increases

•  From the point of view of produc8vity, scale economies (economies of scale) are present if average produc8vity increases with scale

•  From the point of view of cost, scale economies (economies of scale) are present if average cost decreases with scale

•  TERMINOLOGY: returns to scale are (increasing, decreasing, constant) means that there are (scale economies, scale diseconomies, constant returns to scale)

An Example B_Chapter_1.xls

Produc8on Func8on: Q = a(Lb) Cost Func8on: C = (w/a)Q(1/b)

Equivalent formula8ons

Table 1.1: Basket Output of the Island Economy

Produc(on Arrangement

Number of factories (a)

Workers per factory (b)

Output per worker (c)

Output per factory (b x c)

Total output (a x b x c)

Backyard factories

100

1

α

1α

100 x 1α = 100α

1 Large factory

1

100

β

100β

1 x 100β = 100β


Spa8al Extent

•  Concentra8on of employment depends on the “degree” of the scale economy – differs by industry

•  What are examples of different “degrees” of scale economy?


Agglomera8on Economies •  Pecuniary agglomera8on economies

–  Large labor market reduces hiring cost for firms, especially for specialized labor

–  Big city also implies more compe88on among vendors of inputs –  These effects are “self-‐reinforcing” –  May also reduce shipping cost by loca8ng near inputs and output

market (example of Pihsburgh)

•  Technological agglomera8on economies –  Knowledge spillovers –  Large labor pool, more compe88on –  Economies of localiza8on –  Economies of urbaniza8on


Figure 1.2 Technological agglomera8on economies


Figure 1.3 Mine versus market


Figure 1.4 Transport costs


Figure 1.5 Input and output shipping


Figure 1.6 Transport-‐cost-‐minimizing loca8on


Figure 1.7 Scale economies versus transport costs


Figure 1.8 Inter-‐store externali8es


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