1. Land Use Economics Lecture Week 1 Why do Cities Exist?
Based on Urban Economics by Arthur O’Sullivan
Notes by Austin Troy
Lecture by Austin Troy University of Vermont, based on Arthur O’Sullivan, Urban Economics

2. Why do cities exist?
Why not a uniform distribution of people across the landscape?
Comparative advantage
Internal scale economies
Agglomeration economies
Lecture by Austin Troy University of Vermont, based on Arthur O’Sullivan, Urban Economics

3. Comparative advantage (CA)
Based not on absolute advantage but on opportunity cost (OC)
Wheat and wool example: west can make 6 cloth or 2 wheat in one hour; east can only make 1 of each in one hour. West has CA in cloth, east in wheat, because for west OC of cloth is 1/3 wheat unit, while OC of east for wheat is 1 cloth, which is better than 3 for west
CA leads to trade in this case based on OC
Trade is beneficial only if offsets transpo costs
Output per labor hour OC of Production
East West East West
Wheat C 3 C
Cloth W 1/3 W
Lecture by Austin Troy University of Vermont, based on Arthur O’Sullivan, Urban Economics

4. Comparative Advantage and Scale Economies in Transportatoin
Scale econ in transpo means trans cost is not independent of volume shipped; cost per unit mile dec. with volume
Otherwise producers/consumers would engage only in direct trade
Cities develop if scale economies in transpo
Then makes sense for trading firms to operate as intermediaries, locating at central places for collection and distribution of goods
Leads to development of market cities
Occurs when: ag productivity is high enough to generate surplus, CA is large enough to offset transpo costs and scale economies in transpo
Lecture by Austin Troy University of Vermont, based on Arthur O’Sullivan, Urban Economics

5. Internal Scale Economies in Production
As volume increases, productivity per laborer increases
Arise because of:
Factor specialization: worker skill increases with repetition and spend less time switching between tasks
Indivisible inputs: when certain prod input has minimum indivisible scale; i.e. certain input facilities/equipment can’t be scaled down
Lecture by Austin Troy University of Vermont, based on Arthur O’Sullivan, Urban Economics

6. Market area due to scale economies
Defined as area where factory can underprice home production
Workers live near factory and bid up land price, causing higher density
travel cost
Factory cost
Miles from factory (radius)
Net cost
Cost of homemade product
Market area
Market area
Lecture by Austin Troy University of Vermont, based on Arthur O’Sullivan, Urban Economics

7. Agglomeration Economies in Production (AEP)
Why do most cities have more than one factory/production facility?
AEP: positive externalities allow firms to produce at lower cost per unit because of
Localization economies
Urbanization economies
Lecture by Austin Troy University of Vermont, based on Arthur O’Sullivan, Urban Economics

8. AEP: Localization Economies
When production costs of firm in a certain industry decrease as total industry output increases. Due to:
Scale economies in intermediate inputs
Labor market pooling
Knowledge spillovers
Lecture by Austin Troy University of Vermont, based on Arthur O’Sullivan, Urban Economics

9. Localization economies: scale economies in intermediate inputs
Firms often cluster because they share inputs from the same supplier if:
Input D of firm is not large enough to leverage the scale economies in input production alone
Transportation costs are relatively high; this is not only because it is costly to transport input but also design/specification of input requires frequent fact to face contact;
Manhattan dressmaking and button makers—requires face to face because designs must be adaptable and producers must supervise input specifications
Corporate headquarters and advertising/marketing firm: need lots of interaction; needs constantly changing
High-tech firm: needs to locate near its suppliers of non-standard parts; interaction in testing and design of parts
Lecture by Austin Troy University of Vermont, based on Arthur O’Sullivan, Urban Economics

10. Localization economies: scale economies in intermediate inputs
Business firms often need many services (finance, banking, design, insurance, legal, etc.) so big business clusters develop to exploit scale economies provided by them
Public services also important: areas with good transportation infratructure, services, schools, will attract these clusters of firms
Lecture by Austin Troy University of Vermont, based on Arthur O’Sullivan, Urban Economics

11. Localization economies: Labor market pooling
Clustering increases labor efficiency
Facilitates transfer of workers between firms in dynamic industries
Many industries have high mobility between firms, e.g. entertainment
Leads to more stable wage pool, which means wages can be lower in general
Labor pooling is net benefit to firms if wage at isolated site is variable (for good and bad economic times) and wage at cluster is average of those two wages; cluster firm can staff up or downsize more easily than isolated firm
Lecture by Austin Troy University of Vermont, based on Arthur O’Sullivan, Urban Economics

12. Localization economies: knowledge spillovers
Rapid exchange of information/technology in cluster
Based partly on the shared pool of workers
Leads to many innovation “corridors”
Lecture by Austin Troy University of Vermont, based on Arthur O’Sullivan, Urban Economics

13. Product cycle theory
Incubator process: Often firms cluster when they are in earlier stage of development because production techniques unsettled
As production becomes standardized, often move to lower density areas where land and labor costs are lower
Lecture by Austin Troy University of Vermont, based on Arthur O’Sullivan, Urban Economics

14. AEP: Urbanization Economies
Production cost of a firm declines as total output of urban area increases
Occurs for same reasons as localization economies
Different from localization economies in:
Result from scale of entire urban economy
Generate benefits for all firms in city, not just in single industry
Rather than being in one industry, benefits cut across industries
More empirical evidence for localization economies than for urbanization, although Mills points to different results
Lecture by Austin Troy University of Vermont, based on Arthur O’Sullivan, Urban Economics

15. Technology and cities
Telecom technology may reduce some advantages from agglomeration economies
However, evidence suggests it is more complement than substitute—actually generates more demand for face to face contact and travel, partly because allows for greater specialization in design/production
Business travel actually increase 50% from 1985 to 1995
Lecture by Austin Troy University of Vermont, based on Arthur O’Sullivan, Urban Economics

16. Retail: Agglomerative economies in marketing
Shopping externalities occurs when sales of one store are affected by location of others in same product line
The clustering of similar shops causes sales for all to be higher
Two types of products lead to this:
Imperfect substitutes
Complementary goods
Lecture by Austin Troy University of Vermont, based on Arthur O’Sullivan, Urban Economics

17. Imperfect substitutes
Same product type, but subtle differences between product lines; clustering reduces shopping costs by facilitating comparison shopping, attracting more consumers
Attracts new customers (comparison shoppers) who otherwise would not patronize these shops, if isolated
Clothes, jewelry, cars, electronics
Lecture by Austin Troy University of Vermont, based on Arthur O’Sullivan, Urban Economics

18. Complementary goods
Items that complement each other and can be purchased on same trip
E.g. new TV and new TV cabinet
Lecture by Austin Troy University of Vermont, based on Arthur O’Sullivan, Urban Economics