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© Allen C. Goodman, 2006 Why do cities exist? Market Forces.

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1 © Allen C. Goodman, 2006 Why do cities exist? Market Forces

2 © Allen C. Goodman, 2006 Comparative Advantage Trading with each other Suppose that in East, residents can produce 1 bushel of wheat, and 1 bolt of cloth per labor-hour. In West, residents can produce 2 bushels of wheat, and 6 bolts of cloth per labor-hour. Can they (do they) trade?

3 © Allen C. Goodman, 2006 Comparative Advantage Output per Labor Hour EastWest Wheat 1 2 Cloth 1 6

4 © Allen C. Goodman, 2006 Why trade? Wheat Cloth East West 1 2 1 6

5 © Allen C. Goodman, 2006 Suppose West offers 2 cloth for each wheat Wheat Cloth East West 1 2 1 6 East specializes in wheat. WcWc WtWt WtWt CtCt Trades with West. West trades “small amount” with East. Why?

6 © Allen C. Goodman, 2006 Why trade? We can gain from trade. We can be better off. Will East be as well off as West? Why or why not?

7 © Allen C. Goodman, 2006 Why do cities trade? There must be an agricultural surplus. Why? There are scale economies in transportation (train terminals, shipping docks, etc.) People locate in cities to take advantage of the transportation scale economies. What happens to the price of land?

8 © Allen C. Goodman, 2006 Scale Economies in Production Why don’t we build our own cars? A> There are obviously economies of scale. Two reasons –Factor specialization –Indivisible inputs

9 © Allen C. Goodman, 2006 Factor specialization Workers’ skills increase with repetition. Workers spend less time switching from task to task. Volume of cloth 200 400 600 Labor time (hrs. per yd.) 0.25 0.50 Ave. labor time

10 © Allen C. Goodman, 2006 Market areas Why do people buy goods from someone else? A> It’s cheaper, even if they have to travel to get them. Two components to the cost of the cloth. –1. Production cost. –2. Travel cost to get the cloth.

11 © Allen C. Goodman, 2006 0.25 1.00 0.50 0.75 11234234 Factory cost Travel cost Cost of homemade cloth 0 Mkt. area of cloth factory Net cost of cloth (hrs.) Miles from factory

12 © Allen C. Goodman, 2006 Next Klepper, Sections I, II, VII and Table 1 OS – Chapters 2 and 3

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