Why do Cities Exist Basic Types Models

Economic Rationale for Cities - people think that cities just kind of exist, and don't think about why they are where they are - but economists look for a material basis (i.e. movement of capital, labour, goods, services…) in every social arrangement - the main material reason todays cities exist where they do, and in the size they do, is due to what economists call “path dependency” + this means that cities are where they are today, because they are where they were in the past - it's worth taking a minute to think about the economic incentives that the path dependencies of urban location create - the economic rationale in this case is; once you spend this much capital and labour to build an agglomeration of infrastructure, then this attracts a lot of people - this creates a large market - a large demand for goods and services - which attracts suppliers, sellers, and employers + creation of jobs and increases real estate values, which leads to more investment - this creates variety, which has a “spinoff effects” - and this creates a virtuous cycle of large-scale demand and supply - so, the simple fact that people are already concentrated in one area, gives value to that area, and powers markets which generate more value - step beyond - why did cities grow where they grew? + historically, cities grew because they served one of several functions + they can be defensive + they can be administrative centres + since the Industrial Revolution, and later the IT Revolution, they tend to be centres of specialized production (supply) + they also represent large, often diverse markets, and so they are centres of consumption (demand) - economists want to look more closely into the latter w mechanisms Model of production - we assume that cities will not develop as centres of consumption - what would be a model of a city developing as a centre of consumption? + concentration of households makes it easier to organize supply + but historically, this means that grain/rice has to be transported further, so usually a town requires political authority to develop as a centre of consumption - so we focus more specifically on how cities might develop as a centre for production + earlier, Venice as a centre of glass production, Toledo or Damascus for steel + later, Manchester as a centre of textile production + or Hollywood as a centre of movie production Why do Cities Grow? - economists love models + they try to explain the mechanics of reality - how supply, demand, markets, prices, and capital flows work, by abstracting and isolating a few variables, and then running them together City growth model - imagine a scenario in which everyone would stay living equidistant from one another, or in small villages? - historically, people lived apart for various reasons + hunter-gatherers - follow migrating herds + movement towards food sources + nomads - if they were farmers, they had to live far apart, because agricultural land had to be accessible - most land had to be given over to farming, because it takes about four hectares to feed a person per year - they congregated in villages for protection and society, and they farmed the area around them - but they could not live in large cities, or there would be too many people relative to the amount of land - only a few small cities then developed as administrative centres, centres of specialized production... - How do economist-modelers interpret this? Backyard Production - idealized model - this is a model where we assume that people do not need to congregate to produce - they produce all they need on self-sufficient mini farms - in order to have everyone live equidistant, you have to have the following conditions + equal productivity + each area is equally productive of everything - absurd notion + some areas will be good for grazing, whereas some will be good for farming, and some areas will have more iron + constant returns to scale in exchange + constant return from exchange (trade) - e.g. dont get more profit from increasing quantity of trade + + + increasing returns to scale → more profit from increased trade in reality, if you try to execute a trade occasionally you will have higher transaction costs, than if you do it regularly + e.g. the cost per unit of hiring a moving company instead of contracting a random individual is lower, as such companies already have the equipment/workers/experience to perform the task constant returns to scale in production + if you have this, it means that the quantity you can produce remains the same, no matter how many you produce + e.g. if you produce one washing machine per year, the cost of labour and capital is the same than if you produce 1,000 washing machines per day + however, as most of us intuit, if you have a factory which produces washing machines, that “scaling up” production, means that you can produce faster than a single artisan who works individually - this assumes that every household is self sufficient + once land becomes unequal in productivity, there will be a reason to have exchange + once we drop assumption 2, then we see that some merchants will specialize in trade for certain items - allow them to bring things more cheaply to an area, even than people close by could do + when we drop assumption 3 then some people/firms will specialize in making certain things because of increasing returns to scale - more capital → improved tools - with returns to scale in exchange, we are measuring the effects of increasing scale on transaction costs with returns to scale in production, we are measuring the effects of increasing scale on the quantity produced per hour + in this model, the assumption is that you have no returns to scale in production + this assumes that every unit will be made by hand, or using the same type of machinery + but, since industrialization, there have been machines which could produce much more efficiently, especially if you ramp up the scale of production → economies of scale - - building a factory assumes that you will have a larger scale of production - no point in paying for machinery if increased scale is not that great in comparison Average Cost (AC) is important - in a factory, AC goes down dramatically, as production increases dramatically + this means that you have increasing returns to scale in production + instead, if production remains low, AV will be super high and said operation will make no financial sense it is said that, because these 3 assumptions apply in the model, some producers (i.e. households) have comparative advantage over others + if a person were to specialize in producing x thing, transaction cost → opportunity cost of time spent in exchange rather than production + - if all workers are equally productive, then there is no benefit from specialization and exchange, and no trade will occur + if there is no benefit from producing x product in factories, then there will be no factories, because an individual is just as efficient as a factory worker further, the absence of exchange guarantees a uniform distribution of population + if a population were concentrated, then competition for land would bid its price + people in the city would pay a higher price for land without any compensation, giving them an incentive to leave the city + in the Nash equilibrium, the price of land is the same in all locations, and population density is uniform Comparative advantage - - - drop assumption 1 of equal productivity - what happens when some workers become more productive? we assume that we have a region with 2 islands. On one island, there is abundant grazing land, and workers are more productive at producing milk, and also at producing leather (because they have more cows), so they are better at producing shoes on the other island, people are worse at doing both things Why should the 2 islands trade? + because there can still be gains from trade, if each island specializes in the thing that it is better doing when you do the calculations, you find that there are net gains this is that each household which specializes in its comparative advantage product has just as much milk as it did before, but more shoes this is because the one household is so much better at making shoes, that specialization makes trade beneficial we can add exchange time: the transaction cost - the time it takes to make the exchange (moving things, buying/selling) if you add that, you can say that as long as it does not eliminate your gains, then trade will be profitable The Theory of the Firm - when we move to scale economies in exchange - proposition 2 - why do firms exist? + Why doesn't each individual just trade themselves? - has to do with which services a firm should outsource (photocopying? translation? transportation?) and which services should have in-house - if there are no scale economies in exchange, we will not have firms, or cities - each person will paddle their canoe to the mid-point between their 2 islands to trade Scale Economies - not an economy in terms of trade and production - economy in terms of savings - i.e., there in increased profitability - this is an economy or a saving - it means that increasing the amount of production/transaction can create savings per unit - decreased cost per unit, or increased productivity - a trading firm will emerge if there are economies of scale associated with exchange emerge from 2 economic phenomena: + indivisible inputs (e.g., large machinery in factories) + labour specialization - workers who do things more frequently get better at it; productivity is increased via continuity - economies of scale from indivisible inputs and labour specialization will decrease transaction costs, meaning that a trading firm will be more efficient than an individual in executing trades + it can also buy in bulk but not very important - switching to a firm makes both islands better off + the opportunity cost is lower - i.e., spend less time in exchange - in factories, products become cheaper as they can be produced at a faster rate + i.e. more supply to satisfy demand so decrease in price - - a trading firm will cause the development of a trading town, a place with a large population density to fully exploit scale economies in exchange, a trading firm will locate at a place that can efficiently collect and distribute large volumes of output it will set up a port facility on each island, and employ 4 types of workers: wagoners, dock workers, sailors and accountants + i.e., labour specialization workers living near the firm will bid up the price of land, and will economize by living on relatively small lots, which increases population density Trading Cities - this model attempts to create an economic explanation for the creation of trading cities - this model is an idealization which does not necessarily reflect reality - models can be somewhat underwhelming or extremely accurate - this model suggests that trading cities develop when comparative advantage is combined with scale economies in transport and exchange - this provides some insight into the real world laboratory of city growth: urban history (and historical geography) + i.e., locational differences in economic activities - in trading cities, most workers do not produce goods - they work in exchange - instead, they collect and distribute goods produced elsewhere, such as agricultural products from the hinterlands, and handcrafted goods from various locations + e.g. Alexandria, Venice, New York, Carthage… + for a long time, trading cities were located only on coasts + but decreasing transport costs in the 19th century meant that trading cities could be located inland (e.g. Chicago) - reductions in transportation costs were provided by: + turnpikers + canals + steamboats + railroads (biggest importance after industrialization) Factory cities - this happens if we drop assumption 3 that production is done at constant returns to scale - this historically happened later - after the invention of modern machinery + i.e. industrial revolution (e.g. Manchester) - historically, it was the invention of water-powered and steam-powered machinery - most production in England in the 1700s was done in clothes - they were very time consuming to make - non-agricultural work in England was affected - when you have a steam engine, then you can drive 100 looms with a single engine, so it makes sense to put all the looms in one place - factories were run by belts from a single engine - factory cities are located near water sources, and also near coal sources or railroads - and near ports, to export their clothing far, and import cotton and dyes - - - - when you have 100s of workers in one building, then workers will economize on space, to live close to the factory the owners will chose spots on the high ground, and the workers often live in the shadow of the factory, where it is sootier and darker many towns in Europe and the US from the 19th century are built in this pattern, which is still visible according to our model: + we have dropped economies of scale in production + we assume for the moment that milk production stays the same, but there has been an advance in shoemaking, because it is affected by factory and machinery + not producers use indivisible inputs and specialized labour, so factories produce more shoes than a homeowner (e.g., 1 VS 10 shoes/hour now, we can begin to calculate the price of factory shoes we assume that there are 2 inputs: + the average capital cost - for machinery and materials + the average labour cost (wage per hour, divided by how many shoes a worker makes) + the Average Labour Cost is ALC = w (wage) / q (quantity) so if a worker earns 10 dollars per hour, and they make 10 shoes per hour, then the average labour cost for a shoe is 1 dollar/shoe normally a market will ensure that workers are indifferent working on a farm or in a factory + this can be done by providing economic incentives for workers to move near factories (economic incentives which are just enough to convince then) for Nash equilibrium to occur, factory workers have to be compensated for the higher land price in the city + ad also for the commuting costs within the city Key ideas for Factory City Model - Nash Equilibrium - workers in the city will be compensated just enough, to justify them moving from the countryside (to compensate for higher cost of urban living) - average labour cost per unit: amount you pay workers per hour, divided by the number of shoes they make - average capital cost per unit: if you rent machines for 10,000 per year, and you make 5,000 shoes per year, then your average capital cost per unit is 2 euros Market Area - model to explain why factory towns are spaced the way they are - historically, factory towns tended to be located at a distance from one another, partly for the reason that they each served a “market area” - though transport overseas, and via waterways and railroads, might enable some towns to thrive closer together, if their market area was not contiguous with the town - but, in this model, we assume that factory towns are equidistant, because their markets are in the immediate vicinity of the factory - how far apart will factory cities be? + depends on tech and transport - basic assumptions: - - - - - + people will make their own things unless a factory product is cheaper so in the olden days, people made their own clothing, food... + this still happens in many developing countries still! + this happens because factories cannot transport products to every area so what affects the cost of factory goods in a region? the factory has to make things cheaper, but the price of factory goofs also depends on transportation cost + so if a family as to travel far to buy shoes from the factory, then the cost will be offset + IRL, we see this on islands: everything in Hawaii is more expensive, Israel is in many ways effectively an island, since they import so much of their products, and so they are also disproportionately expensive consumer surplus in the lower triangle as consumers are willing to pay 1 euro for product but have access to product for 1 - X price, hence they purchase product at factory instead of buying it themselves so what does this suggest about factory cities? + it assumes that factory cities will develop around a factory workers economize on travel costs by living close to the factory competition for land will bid up its price this leads to higher population density workers therefore receive something like 1.8 gallons of milk (instead of 1), to compensate for living in the city a factory town emerges because scale economies make factory shoes cheaper than homemade shoes as the industrial revolution progressed, the net price of shoes continued to go down + meaning that the catchment area of each factory got larger, as people could afford to go further to a town, to buy the ever cheaper shoes + but of course, transportation was also affected, meaning that the reach of factories became much greater, as transportation costs went dow having a good transportation network can greatly increase the catchment area of a factory