EXAM 1 Chapter 1 The discipline of urban economics is defined by the intersection of geography and economics Households make choices to maximize their utility while firms maximize their profit Urban economics can be divided into six related areas o Market force in the development of cities o Land use within cities o Urban transportation o Crime and public policy o Housing and public policy o Local government expenditures and taxes An urban area has a population density that is high relative to the density of the surrounding area Urban Area A densely settled geographical area with a minimum population of 2 500 people and a minimum density of 500 people per square mile Urban Population People living in urban areas Metropolitan Area A core area with a substantial population nucleus together with adjacent communities that are integrated in an economic sense with the core area o To qualify as a metropolitan area the minimum population is 50 000 people Micropolitan Area Smaller version of a metropolitan area with a concentration of 10 000 50 000 people Principal City The largest municipality in each metropolitan or micropolitan statistical area Three conditions must be satisfied for a city to develop o Agricultural Surplus People outside cities must produce enough food to feed themselves o Urban Production City dwellers must produce something goods or services to exchange and city dwellers for food grown by rural workers o Transportation for Exchange There must be an efficient transportation system to facilitate the exchange of food and urban products The transformation of a rural society into an urban one occurred because o Technological advances increased the agricultural surplus o o Increased the productivity of urban workers Increased the efficiency of transportation and exchange Between now and 2030 urbanization rates are expected to increase everywhere with the largest Eight metropolitan areas all of which are in the developing world are expected to grow by at least The average household changes its residence every 7 years meaning that about 14 of the increases in Africa and Asia 20 over the 10 year period population moves every year The 5 axioms lie at the heart of urban economics and together provide a foundation for the economic models of location choices o Prices adjust to achieve locational equilibrium In general prices adjust to generate the same utility level in different environments getting people to live in both desirable and undesirable locations o Self reinforcing effects generate outcomes o Externalities cause inefficiency An externality occurs when some of the costs or benefits of a transaction are experienced by someone other than the buyer or seller that is someone external to the transaction Cities have all sorts of external costs and benefits In my cases there is a simple solution Internalize the externality with a tax or a subsidy and let individuals who then bear the full social cost and benefits of their actions decide what to do o Production is subject to economies of scale Economies of scale occur when the average cost of production decreases as output When the long run average cost curve is negatively sloped we say that there are increases scale economies in production Occur for 2 reasons Indivisible Inputs As output increases the average cost decreases because the cost of the indivisible input is spread over more output Factor Specialization o Competition generates zero economic profit When there are no restrictions on the entry of firms into a market we expect firms to enter the market until economic profit is zero Economic profit equals the excess of total revenue over total economic cost where economic cost includes the opportunity costs of all inputs Earning zero economic profit means earning normal accounting profit Urban Clusters A scaled down version of an urbanized area Total population of the census blocks that make up an urban cluster is between 2 500 50 000 people Urban Population The Census Bureau defines the nation s urban population as all people living in urbanized areas and urban clusters Chapter 2 The following assumptions eliminate the possibility of cities o Equal Productivity All land is equally productive in producing ex wheat and wool and all workers are equally productive in producing ex shirts and bread o Constant returns to scale in exchange The unit cost of exchange the cost of executing one transaction including transportation cost is constant regardless of how much is exchanged o Constant returns to scale in production The quantity of ex shirts produced per hour are constant regardless of how many shirts a worker produces The same is true for ex bread production Comparative Advantage and Trade opportunity cost o A region has a comparative advantage in producing a particular product if it has a lower o Comparative advantage may lead to specialization and trade o The transaction cost is the opportunity cost of the time required to exchange products and is equal to the amount of output that could be produced during that time Scale Economies in Exchange o The presence of specialization and trade will not necessarily cause a city to develop o Trading firms will emerge if there are economies of scale associated with exchange and trade o Axiom Production is subject to economies of scale o Workers who specialize in transportation tasks will be more efficient than workers who o spend most of their time producing bread or shirts In general because trading firms have lower transaction costs individual households will pay trading firms to handle exchanges o To fully exploit scale economies trading firms will locate at places that can efficiently collect and distribute large volumes of output The concentration of trade workers will bid up the price of land near crossroads river junctions and ports The increase in the price of land will cause people to economize on land by occupying smaller residential lots The result is a place with a relatively high population density city Trading cities in Urban History o Our simple model of the trading city suggests that trading cities develop when comparative advantage is combined with scale economies in transport and exchange o Athens thrived under a system if voluntary trade with other areas exchanging urban goods Eventually switched to a system of conquest and tribute resulting in war and the o The decline of Rome was caused in part by the disruption of its collection system by the for food from