Why do cities exist?
Market Forces
© 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?
© Allen C. Goodman, 2006
Comparative Advantage
Output per Labor Hour
Wheat
East
1
West
2
Cloth
1
6
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Why trade?
East
West
2
Wheat
1
6
1
Cloth
© Allen C. Goodman, 2006
Suppose West offers 2 cloth for each wheat
East
West
East specializes in wheat.
Trades with West.
West trades “small amount” with East.
Why?
2
Wheat
Wt
1
Ct
Wc
Wt
6
1
Cloth
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Why trade?
•
•
•
•
We can gain from trade.
We can be better off.
Will East be as well off as West?
Why or why not?
© 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?
© 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
© Allen C. Goodman, 2006
• Workers’ skills
increase with
repetition.
• Workers spend less
time switching from
task to task.
Labor time (hrs. per yd.)
Factor specialization
0.50
Ave. labor time
0.25
200
400
600
Volume of cloth
© 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.
© Allen C. Goodman, 2006
0.75
0.50
0.25
Net cost of cloth (hrs.)
1.00
Cost of homemade cloth
Travel cost
Factory cost
4
3
2
1
0
1
Miles from factory
Mkt. area of
cloth factory
© Allen C. Goodman, 2006
2
3
4
Next
• Klepper, Sections I, II, VII and Table 1
• OS – Chapters 2 and 3
© Allen C. Goodman, 2006