1. Introduction and Axioms of Urban Economics
Chapter 1
Introduction and Axioms of Urban Economics

2. Urban Economics Urban economics combines both economics and geography:
Economics explores how people make decisions under scarcity, while
Geography explains where human activity occurs.
Urban economics explores the location choices of maximizing agents.

3. Areas of Urban Economics
Market forces within the development of cities
Land use
Urban transportation
Crime and Public Policy
Housing and public policy
Local government expenditure and taxes

4. Urban Area
Urban area is defined based on population density, the number of people living in a given area.
An urban area has a high population density relative to surrounding areas. (Can agriculture be the prominent activity in cities?)
Therefore, in an urban area there is frequent contact between different economic activities.

5. For a city to develop
Three conditions have to be satisfied for a city to develop
The first condition:
Agricultural surplus
The rural dwellers must produce enough food to provide for themselves as well as city dwellers.

6. For a city to develop The second condition: Urban production
City dwellers must produce something to exchange with rural people for the food they grow.

7. For a city to develop The third condition: Transportation for exchange
An efficient network of transportation has to exist to facilitate the exchange of food and urban products.

8. The rise of an urban society
We will see later that the transformation from a rural to an urban society was facilitated by technological advances that:
increased agricultural surplus,
Increased the productivity of urban workers, and
Increased the efficiency of exchange and transportation.

9. Five Axioms of Urban Economics

10. 1. Prices adjust to achieve locational equilibrium
Locational Equilibrium is achieved when given the prices of different locations every one is satisfied with his location, i.e. no incentive to move.
Prices adjust so people are indifferent between desirable and undesirable locations.

11. 2. Self Reinforcing Effects Generate Extreme Outcomes
A change in something leading to additional changes in the same direction.
Example: Concentration of automobile sellers in a certain area makes the area more attractive for other automobile sellers to locate, resulting in more concentration.

12. 3. Externalities Cause Inefficiency
When benefits or costs of a transaction fall on a third party, the market outcome is socially inefficient.

13. Pollution and Market Inefficiency
Price of
Aluminum
Marginal Social cost
(MPC+ external cost)
Tax= External Cost
Demand
(MPB)
Supply
(MPC)
Optimum
QWELFARE
Equilibrium
QMARKET
Quantity of
Aluminum

14. 4. Production is Subject to Economies of Scale
Economies of scale occur when doubling all inputs of production results in more than doubling output.

15. worker
Number of machines 5 10 15 20 25 30 35 40 1
100
250
340
410
400
390 2 60
360
450
520
530
500 3
480
570
610
620 4
130
440
580
640
690
700
650
710
760
770
780 6
110
540
800
820
830
840 7
550
720
790
850
870
890 8 80
680
860
880
900

16. Economies of scale occur for two reasons:
Indivisible inputs: when capital inputs are lumpy and cannot be scaled down for small operations.

17. Economies of scale occur for two reasons:
Factor specialization: dividing production into smaller tasks each undertaken by few workers. This is possible with a large scale of production.

18. Scale Economies and cost
When there are economies of scale in production, the average cost of production decreases as output increases. AC AC AC Q Q Q

19. 5. Competition Generates Zero Economic Profit
In the absence of barriers to entry, we expect firms to enter a market until economic profit is zero.
This implies that the factors of production are earning their opportunity costs, i.e., just enough to keep them in business. In that case they are earning normal profit

20. Example
Adam decided to open a bakery. He could earn $50,000/ year in another job. He withdraws his savings from the bank, $ , which was earning 7%. The market for baked goods is a perfect competitive market
After paying all his expenses how much money do you expect Adam to be making in a year?