The Economic Development of Urban Areas

Suppose a city starts at this point Suppose a city starts at this point. It is near a river for fresh water and inland transportation, along the coast for sea transport, and near resources like trees and good soil. It initially starts with residences and lower-order retailing.

Its location on the coast and on the river makes it a transshipment point, and port activity (transportation companies, cargo handling, warehousing, business services) develops.

Because this is a transshipment point, manufacturers may start to locate here. Also, since it has become a market, market-oriented producers will locate here as well.

Economies of scale and improvements in technology encourage manufacturing firms to be larger, leading to more employees and more people in the city.

As a particular industry grows in size, localization economies take effect, which encourages more firms in the industry to locate here: Specialized machinery and other intermediate inputs Sharing a labor pool Improved labor matching Knowledge spillovers

The growing city attracts retailers: It may now be the median location for some firms. Its market area is large enough to attract higher order retailing (Central Place Theory)

The growing city attracts retailers: There may be comparison shopping for substitutes There may be one stop shopping for complements

As the entire area grows, urbanization economies take affect: More public and private infrastructure Division of labor leads to more specialization (law, accounting, finance, PR, HR, etc.)

As the entire area grows, urbanization economies take affect: Labor pooling Labor matching Knowledge spillovers

As the urban economy matures: Even higher order shopping (Central Place Theory)

If the city gets too large, urban diseconomies may occur: Pollution Congestion Crime and other psychological problems