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LecNotes Ch02

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darnell
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LECTURE NOTES

URBAN ECONOMICS, SIXTH EDITION

ARTHUR O’SULLIVAN
MCGRAW-HILL/IRWIN

Chapter 2 of Urban Economics: Why Do Cities Exist?

I. Introduction
A. Cities exist because of labor specialization
B.Centralized production generates cities
C.Plan: List assumptions that preclude cities; drop them to see what
happens

II. A Region Without Cities—Backyard Production


A. The assumptions
1. No differences in productivity for labor or land
2. Constant returns to scale in exchange
3. Constant returns to scale in production
B.Implication: No specialization or exchange
1. No productivity benefit from specialization
2. Positive exchange cost (time): No exchange
3. Uniform price of land and population density

III. A Trading City


A. Drop assumption of equal productivity
1. North has comparative advantage in shirts
2. Table 2.1: Comparative Advantage
B.Comparative Advantage and Trade
1. North shifts production to shirts; South shifts production to
bread
2. Table 2.2: Gross gain from trade = 2 shirts for each region
3. Net gain = gross gain - transaction time (t)
a. North: If t < 20 min (time for 2 shirts), net gain > 0
b. South: If t < 2 hr (time for 2 shirts), net gain > 0
C.Scale Economies in Exchange
1. In absence of scale economies, direct trade between
households
2. Axiom 4: Production is subject to economies of scale
3. Scale economies mean lower cost for intermediary
4. Workers in trading firms economize on commuting and bid
up the price of land
5. High price of land increases population density, generating
a city
D.Applying the Concepts: Matter Transmitter in Trading City

IV. Trading Cities in Urban History


A. Trading Cities in World History
1. Phoenician cities on Mediterranean coast
2. Athens as regional trading center
3. Italian city-states trade between Europe and North Africa
and East
B.Coercive transfer payments instead of voluntary trade
1. Athens after Persian war
2. Rome as Parisitopolis?
C.Trading Cities in American History
1. Innovations that decreased transaction costs and promoted
trading cities
a. Turnpikes replace slippery roads
b. Canals increase trade areas (Erie and NYC)
c. Steamship generated two-way travel
d. Railroad: decline of river cities and rise of rail cities
2. Comparative advantage: Cotton gin and cotton-trade cities

V. A Factory Town
A. Drop assumption of constant returns in production
1. Scale economies in shirt production: factory worker 6 times
as productive
2. Outside factory, home worker produces 1 shirt or loaf per
hour
B.Determining Wages and Prices
1. Wages ensure locational indifference
2. City wage covers opportunity cost of factory time and
living cost
3. Price high enough to cover wages and indivisible input cost
4. Table 2.3: Cost of Factory Shirt
C.The Market Area of a Factory Town
1. Figure 2.1: Net price and market area
a. Net price = factory price + consumer travel cost
b. Market area: factory underprices home producers
2. Factory town develops around factory
a. Workers economize on commuting cost by living close
b. Bidding up of land increases population density (city)
D.Applying the Concepts: Self Singing, Choral Groups and the
Internet

VI. The Industrial Revolution and Factory Cities


A. Innovations in Manufacturing
1. Whitney’s system of interchangeable parts
2. Sewing machines, clothing factories, clothing cities
3. Shoe factories and cities
B.Innovation in Transportation
1. Innovations decreased net price of factory products
2. Turnpikes, steamships, railroad
C.Innovation in Agriculture
1. Sowing: plows go from wood to iron to steel
2. Reaping: McCormick’s reaper
D.Energy Technology and Location Decisions
1. Waterwheels turned by waterfalls and fast streams
2. Steam replaced moving water, generating factories with
access to coal
3. Electricity made factories more footloose

VII. A System of Factory Towns


A. Axiom 5: Competition generates zero economic profit
1. Firms enter the shirt market until each makes zero
economic profit
2. Figure 2.2: Firms span the region
C.Land rent in the region: Axiom 1
1. Rural residents bid up price of land near cities and factories
2. Urban workers bid up the price of land in cities
D.Applying the Concepts: Spring-Loaded Sneakers

VIII. Materials-Oriented Firms and Processing Towns


A. Market-oriented industry: shirt production
1. Implicit assumption: zero input transport cost
2. Costly output transport orients firms to output market
B.Materials-oriented industry
1. Input more costly to transport than outputs
2. Classic example is weight losing activity
C.System of Processing Towns
1. Scale economies in processing, so small number of plants
2. Farmers sell beets to processing plant offering highest net
price
3. Figure 2.3: Entry and competition generates zero profit
D.Other Examples of Materials-Oriented Industries
1. Steel towns: near coal, then ore
2. Leather towns near forest for tannin
3. Lumber towns near forests
E.Applying the Concepts: Beer and Wine

IX. Applying the Concepts


A. Matter Transmitter in Trading City
B.Self Singing, Choral Groups, and the Internet
C.Spring-Loaded Sneakers
D.Beer and Wine
E.Helicopters and Cities in Retireland

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