URBAN ECONOMICS

Ch1

1. THE FIVE AXIOMS OF URBAN ECONOMICS:

➢ Axiom 1: Prices Adjust to Achieve Locational Equilibrium:
A locational equilibrium occurs when no one has an incentive to move.
Suppose that you and Bud are competing for two rental houses, one along a
beautiful beach and one along a noisy highway.
If the two houses have the same price (the same monthly rent), you would prefer
the beach house, and so would Bud.
➢ Axiom 2: Self-Reinforcing Effects Generate Extreme Outcomes:
A self-reinforcing effect a change in something leading to additional changes in
the same direction.
This axiom means that if one type of person moves into an area, then that area
will become more attractive to more of the same types of people.
Suppose artists and creative types are initially spread out equally across a dozen
cities in a region.
➢ Axiom 3: Externalities Cause Inefficiency:
In most transactions, the costs and benefits of the exchange are restricted to the
individual buyer and seller.
The consumer pays a price equal to the full cost of producing the good, so no
one else accepts a cost from the transaction.
Similarly, the consumer is the only person to benefit from the product.
An external cost: occurs when a consumer pays a price that is less than the full
cost of producing a product.
An external benefit occurs when a product purchased by one person generates
a benefit for someone else. For example, in a neighborhoods where one person
may make improvements to their property thus helping their neighbor’s increase
their property value because the area will suddenly become more desirable.
➢ Axiom 4: Production is Subject to Economies of Scale:
Economies of scale occur when the average cost of production decreases as
output increases.
Scale economies occur for two reasons:
 o Indivisible inputs: Some capital inputs are “lumpy” and cannot be
scaled down for small operations, its same whether to produce one or a
thousand units.
o Factor specialization: Dividing production into smaller tasks each
undertaken by few workers. This is possible with a large scale of
production.

➢ 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.
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.

Ch2

1. Types of Cities:
➢ Economic City: Area with a relatively high population density that contains a
set of closely related and economically integrated activities (flow of workers,
money, etc...).
➢ Political City: Area over which a municipal corporation exercises political
authority, providing local government services and collecting taxes.
Using definitions of central city or municipality where a municipal corporation
exercises political authority and provides local services.
2. The following assumptions eliminate the possibility of cities.
➢ Equal productivity. All land is equally productive in producing wheat and
wool, and all workers are equally productive in producing shirts and bread.
➢ Constant returns to scale in exchange. The unit cost of exchange (the cost of
performing one transaction, including transportation cost) is constant,
regardless of how much is exchanged.
➢ Constant returns to scale in production. The quantity of shirts produced per
hour is constant, regardless of how many shirts a worker produces. The same is
true for bread production.
3. The industrial revolution and factory cities: Our simple model of the factory city
suggests that a factory city develops because scale economies make factory shirts
cheaper than homemade shirts.
The Industrial Revolution of the 19th century produced innovations in manufacturing
and transportation that shifted production from the home and the small shop to large
factories in industrial cities.
In contrast to the earlier trading cities, workers in factory cities produced products
rather than simply distributing products produced elsewhere.
4. Innovations in Transportation: Innovations in intercity transportation contributed to
industrialization and urbanization.
The construction of canals allowed a denser network of inland water transport.
The development of the steamship allowed two-way travel on major rivers, and the
railroad system increased the speed and reach of the transportation system.
All of these innovations decreased the relative price of factory goods, contributing to
the growth of factory cities.
5. Innovations in Agriculture: One of the three conditions for the development of cities
is an agricultural surplus to feed city dwellers.
The Industrial Revolution generated a number of innovations that increased agricultural
productivity.
Farmers substituted machinery for muscle power and simple tools, increasing the output
per farmer.
The increased agricultural productivity freed people to work in urban factories and
commercial firms.

Ch3

1. Two types of agglomeration economies

➢ Localization Economies: is economies of scale that arise from having many
firms in the same industry located near one another.
➢ Urbanization Economies: is economies of scale that arise from having many
people located together, regardless of the industry in which they work.
2. Why do Firms Cluster?
➢ Sharing Intermediate Inputs: Some competing firms locate close to one
another to share a firm that supplies an intermediate input.
 The conventional list of production inputs includes labor, raw materials, and
capital (machines, equipment, structures), but usually ignores intermediate
inputs.
➢ Sharing a labor Pool: Labor pool is the source of trained people from which
workers can be hired.
Sharing a labor pool is beneficial to firms given significant variation in demand
facing each firm, e.g., Software & TV programs.
A cluster of firms facilitates the transfer of workers from unsuccessful firms to
successful ones.
➢ Labor Matching: In a typical economic model of a labor market, we assume
that workers and firms are matched perfectly.
Each firm can hire workers who have precisely the skills the firm requires. In
the real world, things are not so tidy.
Workers and firms are not always perfectly matched.
Mismatches require training costs to eliminate skill gap.
➢ Knowledge Spillovers: This is helpful in causing firms to cluster as they can
gain from one another’s knowledge and helpful educated workers
Firms in an industry share ideas and knowledge

Ch4

1. Specialized and Diverse Cities: Do cities specialize in a narrow set of economic

activities, or do they generalize, producing a diverse mix of products?
The specialized cities develop because of localization economies.
The diverse cities develop because of urbanization economies.
In fact, specialized and diverse cities are actually complementary, serving different
roles in a market economy.
Many firms start their lives in a diverse city and eventually relocate or transfer to a
specialized city.
Diverse cities foster innovation, while specialized cities facilitate efficient production.
2. A Model of Laboratory Cities: shows the roles of diverse and specialized cities in the
product cycle. A diverse city has a rich variety of products and production processes,
providing fertile ground for new ideas about how to produce new products. or
 ➢ Firm gropes for ideal production process for new product by building
prototypes, imitating other firms in the process.
Once ideal process found, firm produces large quantity in a specialized city.
Location for experimentation: Diverse city or series of specialized cities?
➢ Good news: lower prototype cost. The cost of producing a given prototype
will be lower in a specialized city because each city has the specialized inputs
for that production process.
➢ Bad news: higher moving cost. The search for the ideal process requires the
firm to move from one specialized city to one another.
Diverse city is more profitable if moving costs are relatively large
3. Differences in City Size:
➢ Differences in localization & urbanization economies:
City S has small localization economies and its optimum population is smaller
than that of city M with its large localization economies.
City B has large urbanization economies and a large population.
The set of points { s , m , b } shows a possible equilibrium, with all residents
achieving the utility level u * and populations of 1 million (city S), 3 million
(city M), and 6 million (city B) adding up to the regional population of 10
million.
➢ Local Goods and City Size:
When producing local goods for which economies of scale exit, sellers are more
likely to locate in larger cities, creating new employment opportunities.
Thus, Larger cities will create more employment opportunities than smaller
ones.
Larger cities are more likely to grow than smaller ones.

Ch5

1. In an urban economy, there are two sorts of growth.

First, economic growth is defined as an increase in a city’s average wage or
per-capita income.
Second, employment growth is defined as an increase in a city’s total
workforce.
2. Sources of Economic Growth:
➢ Capital deepening: Capital deepening is defined as an increase in the amount
of capital per worker.—it increases productivity and income because each
worker works with more capital.
➢ Increases in Human Capital: A person’s human capital includes the
knowledge and skills acquired through education and experience.
An increase in human capital increases productivity and income.
➢ Technological Progress: Any idea that increases productivity—from a
worker’s commonsense idea about how to better organize production, to a
scientist’s invention of a faster microprocessor is a form of technological
progress. The resulting increase in productivity increases income per worker.
➢ Agglomeration Economies: Physical proximity increases productivity through
input sharing, labor pooling, labor matching, and knowledge spillovers.
Cities increase productivity and income because they bring the inputs to the
production process together and facilitate face-to-face communication.
3. URBAN LABOR MARKET: We use a model of the urban labor market to explore
the market forces behind the equilibrium wages and total employment in a city.
The demand for labor comes from firms in the city, while supply comes from
households living in the city.
➢ A labor-demand curve is also a marginal-benefit curve: it shows the marginal
benefit of hiring an additional unit of labor.
➢ The supply curve is positively sloped, indicating that the higher the wage, the
larger the number of workers in the city.