class: center, middle, inverse, title-slide # Econ 330: Urban Economics ## Lecture 3 ### John Morehouse ### April 5th, 2021 --- class: inverse, center, middle # Lecture III: Existence of Cities --- name: schedule # Schedule ## Today -- 1) .hi.purple[Data & History] 2) .hi.purple[Why do cities exist?] 3) .hi.purple[Introduction to Clustering] -- -- ## Upcoming - .hi.slate[Intro Quiz] - .hi.slate[Reading] (Chapter II & III _ToTC_) - .hi.slate[HW 1] (due on April 11th) -- --- #About HWI HW I will be posted after class (tonight or tomorrow morning) - Due on .hi.orange[April 11th] on canvas -- - HW I _looks_ very long. I want to give everyone sufficient space to write their answers - Majority of questions are from this week. -- -- ## Important - Use scratch paper first if needed. __Points will be deducted for messy work__ - Do what you can to make Emily's life easier. -- --- name: data #Most People Live in Cities <iframe src="https://ourworldindata.org/grapher/urban-and-rural-population?time=2017" style="width: 100%; height: 100%; border: 0px none;"></iframe> --- #A Global Phenomena <iframe src="https://ourworldindata.org/grapher/share-of-population-urban?time=2017" style="width: 100%; height: 600px; border: 0px none;"></iframe> --- name: history #A Brief History Lesson ##Claim Over the last few hundred years the world _has become_ .hi.purple[flat] -- .col-left[ - .hi[1840s] + : .hi.orange[Rail transit] takes over ] <img src="figures/cronon.png" width="90%" height="58%" style="display: block; margin: auto;" /> Source: [Cronon's _Natures Metropolis: Chicago and the Great West_](https://www.amazon.com/Natures-Metropolis-Chicago-Great-West/dp/0393308731) -- --- #A Brief History Lesson ##Claim Over the last few hundred years the world _has become_ .hi.purple[flat] .col-left[ - .ex[1840s >: Rail transit takes over] - .hi[1840s]: .hi.orange[telegraph] .hi[1870's]: .hi.orange[telephone]. Informational distance `\(\rightarrow\)` 0 ] --- #A Brief History Lesson ##Claim Over the last few hundred years the world _has become_ .hi.purple[flat] .col-left[ - .ex[1840s >: Rail transit takes over] - .ex[1840s: telegraph 1870s: telephone. Informational distance] `\(\rightarrow\)` .ex[0] - .hi[1914]: First commercial .hi.orange[airline flight]. Physical distance shrinks again ] --- #A Brief History Lesson ##Claim Over the last few hundred years the world _has become_ .hi.purple[flat] .col-left[ - .ex[1840s >: Rail transit takes over] - .ex[1840s: telegraph 1870s: telephone. Informational distance] `\(\rightarrow\)` .ex[0] - .ex[1914: First commercial airline flight. Physical distance shrinks again] ] .col-right[ - .hi[1980s] (US): Deregulation of airlines. Competition increases. .hi.orange[Prices plummet] - [This guy](https://en.wikipedia.org/wiki/Alfred_E._Kahn) celebrates crowded flights <img src="figures/kahn.jpg" width="40%" height="40%" style="display: block; margin: auto;" /> ] --- name: paradox #A Paradox .qa[Q]: What is the .hi.orange[paradox] between the things I have just discussed? -- .qa[A]: _Despite_ the world "becoming .hi[smaller]" the urban population has rapidly .hi[increased] - Would you expect the opposite? Why? -- This is .hi.purple[motivation] to ponder the question: why do cities .hi.purple[exist]? -- - __Fundamentals__ of this question can also inform why: - Some cities have .hi.purple[succeeded] - and other have .hi.purple[declined] -- --- class: inverse, middle # Checklist .col-left[ 1) .hi[Data & History] ✅ - Growth of urban populations - Shrinking of the earth - The paradox 2) .hi.purple[Why do Cities exist?] ] .col-right[ 3) .hi.purple[Introduction to Clustering] ] --- name: exist # Why do Cities Exist? What do you think? .hi.purple[Discuss] -- This question has a pretty simple answer. What is it? -- <center> <font size="15"> Trade </font> </center> -- <center> <font size="15"> with a few caveats... </font> </center> -- Suppose there was .hi[no trade]. What would we need for this to be true? _Would this lead to no cities?_ -- - Even with trade, _possible_ that households trade amongst themselves (still no cities) -- --- name: trade # No Cities -- 1) No differences in .hi[productivity] of __land__ _or_ __labor__ - Differences in either of these generate .hi[comparative advantage] -- -- 2) Constant Returns to Scale (CRS) in .hi[Exchange] & transportation -- - .hi.purple[Per unit price] to .hi[trade] goods _is the same_ no matter how much is traded - No need for distributors/exchange firms -- -- 3) CRS in .hi.orange[Production] -- - .hi.purple[Per unit price] of .hi.orange[producing] goods is the same no matter how many you produce - .hi.orange[Factory] (a collection of workers and capital) can make goods _at the same cost_ as .hi.orange[homes] -- --- # Relax Assumption 1 .hi.purple[Question]: Is all land and labor equally productive? -- .hi.purple[Answer]: Nope. Let's relax this assumption - Differences in productivity across cities generate .hi[comparative advantage] -- --- # Back to 201 ##Reminder: - .hi.slate[Absolute Advantage] (AA): An economic agent or entity has .hi.purple[AA] in exchange if they can produce more of the good in the same amount of time - or the same amount of the good in less time -- - .hi.slate[Comparative Advantage] (CA) : An economic agent or entity has .hi[CA] in exchange if they can produce the good at a lower _oppurtunity cost_ -- -- .hi.slate[Production Possibilities Frontier] (PPF): All possible combinations of goods that an economic agent or entity can produce -- --- # PPF's .hi.slate[Example]: - Suppose we have two countries, A & B. They are producing guns and oil Each counties PPF is .note[given] by: - .hi[County A]: `\(\color{#e64173} {Guns_A = 10 - 2*Oil_A}\)` - .hi[County B]: `\(\color{#6A5ACD} {Guns_B = 20 - 5*Oil_B}\)` -- 1) Graph each countries PPF 2) Determine who has the AA in each good and who has the CA in each good -- --- #PPF's <img src="lecture_three_files/figure-html/ppf-1.svg" style="display: block; margin: auto;" /> --- #PPF's <img src="lecture_three_files/figure-html/ppf2-1.svg" style="display: block; margin: auto;" /> --- # CA in Oil? __Idea:__ Whoever _gives up less_ to produce the same amount extra has the comparative advantage. Check: <img src="lecture_three_files/figure-html/ppf3-1.svg" style="display: block; margin: auto;" /> --- # PPF Heuristics When looking at PPFs, to determine: 1) .hi.purple[AA]: Check .hi[intercepts] - Whoever has higher - valued .hi[intercept] has the .hi.purple[AA] in production of that good 2) .hi.purple[CA]: Check .hi.orange[slopes] - A __steeper__ .hi.orange[slope] indicates .hi.purple[CA] on the vertical axis - A __shallower__ .hi.orange[slope] indicates .hi.purple[CA] on the horizontal axis --- # Relax Assumption 2 In absence of scale economies, households trade directly<sup>.hi[†]</sup> .footnote[ .hi[†] Scale economies: _bigger_ `\(\rightarrow\)` _cheaper per unit_ ] -- - .hi[CRS in Exchange]: `\(\implies\)` households are just as efficient at executing trades as firms (no cost benefits to scaling) - No reason to pay a firm to do so (and thus no reason to pay for density) -- --- # Relax Assumption 2 However, firms generally have lower transaction costs than individuals, so individuals are willing to pay firms to facilitate trade (meaning there are economies of scale in exchange). - To fully take advantage of scale economies in exchange, firms locate such that they minimize costs of distributing output - They locate near rivers, ports, crossroads, etc `\(\implies\)` higher prices of land `\(\implies\)` density - .hi[Result:] trading cities. This is what we had before the industrial revolution. --- name: factory # Relax Assumption 3 Suppose we relax the CRS in production assumption. Specifically, let's suppose workers at a factory can produce a good at a cheaper per-unit cost than at home -- ##Example Consider a shirt making factory - .hi[Home] production: `\(20\)` p shirt. .hi[Factory]: `\(12\)` p shirt - economies of scale -- - Locates in a town with 50 miles to east and west of villages - 50 cents/mile to ship west. 20 cents/mile to ship east -- -- --- #Factory Towns Under what condition will a consumer purchase the shirt from a factory over home? `\begin{align*} \underbrace{p_f}_\text{factory price} + \underbrace{t \times d}_\text{transit cost = cost p mile$\times$miles} \leq \underbrace{p_h}_\text{Home Price} \end{align*}` -- .qa[Questions]: 1. Graph the cost of shirts throughout the entire region 2. Find the .hi.orange[market area] of the town -- - Find the __sum__ of the .hi.orange[maximum distances] to the east and west that consumers will purchase the shirt from the factory -- -- --- #Regional Costs <img src="lecture_three_files/figure-html/factory_town-1.svg" style="display: block; margin: auto;" /> --- #Market Area Calculation Market area depends on which side we are looking at. Let `\(m\)` denote miles - .hi.slate[West] - Consumers buy from factory if `\(12 + .5*m_{west} \leq 20 \implies m_{west} \leq 16\)` - .hi.slate[East] - Consumers buy from factory if `\(12 + .2*m_{east} \leq 20 \implies m_{east} \leq 40\)` __Market area__: `\(40+16 = 56\)` --- # Factory Towns 1. Would workers rather live .hi.orange[closer] or .hi[further] from the factory? -- - .hi[Closer!] -- 2. What happens to land-prices .hi[close] to the factory? -- - They .hi.purple[increase] -- 3. What happens to .hi[density]? -- - It will .hi.purple[increase] -- __Result:__ Factory town! --- class: inverse, middle # Checklist .col-left[ 1) .hi[Data & History] ✅ - Growth of urban populations - Shrinking of the earth - The paradox 2) .hi[Why do Cities exist?] ✅ - 3 conditions for no trade - Comparative advantage & Factory Towns ] .col-right[ 3) .hi.purple[Introduction to Clustering] ] --- # Clustering So we explained _why_ cities exist. Can we explain why there might be more than one firm? - Let's start by asking why firms cluster. Where to start? __Axiom 5__ -- __Axiom 5__: .hi[_Competition generates zero economic profit_] -- - If a firm is making positive economic profit, more firms enter the market - What happens to the profit per firm as more firms enter? -- - It decreases. Eventually goes to zero -- --- name: zero_profit #Example How many firms are in the cluster? <img src="lecture_three_files/figure-html/cluster_graph-1.svg" style="display: block; margin: auto;" /> --- class: inverse, middle # Checklist .col-left[ 1) .hi[Data & History] ✅ - Growth of urban populations - Shrinking of the earth - The paradox 2) .hi[Why do Cities exist?] ✅ - 3 conditions for no trade - Comparative advantage & Factory Towns ] .col-right[ 3) .hi[Introduction to Clustering] ✅ - The zero profit condition ] --- #Table of Contents .col-left[ ###Data & History .smallest[ 1. [Urban Populations](#data) 1. [History](#history) 1. [Paradox](#paradox) ] ###Existence .smallest[ 1. [Why do Cities Exist?](#exist) 1. [Trade Basics](#trade) 1. [Factory Towns](#factory_towns) ] ] .col-right[ ##Clustering 1. 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