Introduction and Axioms of Urban Economics
McGraw-Hill/Irwin
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Urban Economics: Economics meets geography Urban economics combines both economics and geography Economics explores how people make decisions under scarcity, while Geography explains where human activity ocurs Urban economics explores the location choices of maximizing agents
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Market forces in the development of cities
Why do cities exist? Why do competing firms cluster? Why do cities vary in size? What causes urban growth and decline? Who benefits from urban growth?
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What is a City?
Place with a relatively high population density Census definitions
Urban area: minimum population = 2,500
Urban population: people living in urban areas
Metropolitan area: at least 50k people Micropolitan area: 10k to 50k people Principal city: largest municipality in metro area
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Why Do Cities Exist?
Conditions for cities
Agricultural surplus Urban production to exchange for food
Transportation system for exchange
Facts on cities: Figure 1-1, 1-2, 1-3; Tables 1-1, 1-2
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Five Axioms to Know About Urban Economics
Economic theory is based on a few
assumptions or axioms.
These axioms are a list of conditions that
must be true for the theory to be correct.
They are five axioms in urban economics
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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.
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For a City to Develop
Three conditions have to be satisfied for a city to develop The first condition:
The rural dwellers must produce enough
food to provide for themselves as well as city dwellers.
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Agricultural surplus
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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.
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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.
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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
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and transportation.
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Axiom 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. Examples of prices behind locational equilibrium
Rent on beach house > Rent on highway house Land rent in center > Land rent on fringe
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Axiom 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. Cluster of artists attracts other artists
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Axiom 3: Externalities Cause Inefficiency
When benefits or costs of a transaction fall on a
third party, the market outcome is socially inefficient. Externality: cost or benefit of a transaction experienced by someone else External cost: burning gasoline affects breathers External benefit: painting a peeling house increases property values
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Axiom 4: Production is Subject to Economies of Scale
Economies of scale occur when doubling all inputs of production results in more than doubling output. Economies of scale: Average cost decreases as quantity increases
Indivisible inputs: Required to produce one or a thousand units Factor specialization: Benefits from continuity and repetition
Extent of scale economies varies across activities
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worker
Number of machines
5
0 1 0 30
10
0 100
15
0 250
20
0 340
25
0 410
30
0 400
35
0 400
40
0 390
2
3 4 5 6
60
100 130 130 110
250
360 440 500 540
360
480 580 650 700
450
570 640 710 760
520
610 690 760 800
530
620 700 770 820
520
620 700 780 830
500
610 690 770 840
7
8
100
80
550
540
720
680
790
800
820
830
850
860
870
880
890
900
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Axiom 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 Economic cost includes explicit cost and opportunity cost of time and funds Firms earn just enough to stay in business, but not enough to attract entrants
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EXAMPLE
Adam decided to open a bakery. He could earn $50,000/ year in another job. He withdraws his savings from the bank, $100 000 , 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?
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