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Introduction and Axioms of Urban Economics: Mcgraw-Hill/Irwin ©2009 The Mcgraw-Hill Companies, All Rights Reserved

The document introduces the key concepts and axioms of urban economics, including why cities exist and develop. Three conditions are necessary for a city to form: agricultural surplus, urban production to exchange for food, and an efficient transportation network. Five axioms that underlie urban economic theory are also outlined, such as how prices adjust to achieve locational equilibrium and how externalities can cause market inefficiencies.

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230 views23 pages

Introduction and Axioms of Urban Economics: Mcgraw-Hill/Irwin ©2009 The Mcgraw-Hill Companies, All Rights Reserved

The document introduces the key concepts and axioms of urban economics, including why cities exist and develop. Three conditions are necessary for a city to form: agricultural surplus, urban production to exchange for food, and an efficient transportation network. Five axioms that underlie urban economic theory are also outlined, such as how prices adjust to achieve locational equilibrium and how externalities can cause market inefficiencies.

Uploaded by

Sixd Waznine
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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Introduction and Axioms of Urban Economics

McGraw-Hill/Irwin

2009 The McGraw-Hill Companies, All Rights Reserved

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
2009 The McGraw-Hill Companies, All Rights Reserved 1-2

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?

2009 The McGraw-Hill Companies, All Rights Reserved

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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

2009 The McGraw-Hill Companies, All Rights Reserved

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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

2009 The McGraw-Hill Companies, All Rights Reserved

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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


2009 The McGraw-Hill Companies, All Rights Reserved 1-11

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.

2009 The McGraw-Hill Companies, All Rights Reserved

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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

2009 The McGraw-Hill Companies, All Rights Reserved

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


2009 The McGraw-Hill Companies, All Rights Reserved

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

2009 The McGraw-Hill Companies, All Rights Reserved

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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

2009 The McGraw-Hill Companies, All Rights Reserved

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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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