econ 135 fall08 lecture1

econ 135 fall08 lecture1 - Urban Economics Lecture 1...

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1 Urban Economics Lecture 1 Introduction Course involves applying economic reasoning to cities, why they exist, how they are arranged, and how they are related to each other. We will also apply economic analysis to urban problems, consider how economics can explain some urban problems and suggest how to address them.
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2 I. Why do cities exist? When do they not exist? Comparative advantage and transport costs No cities would exist if (a) there were no comparative advantage in production Or (b) the cost of transport is so high that trade isn’t worthwhile. No comparative advantage: means that everyone has the same tradeoff between production of two goods. Example 1 : each person can make one yard of cloth or one bushel of wheat in one hour, so the tradeoff is 1/1. This means that there’s no gain from trading wheat for cloth.
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3 Example 2 : person A can make two yards of cloth or one bushel of wheat in one hour and person B can make one yard/one bushel in one hour. Therefore person A has a comparative advantage in production of cloth and person B in production of wheat. Person A gives up only one bushel of wheat to get two yards of cloth, while person B gives up one bushel of wheat to get one yard of cloth. Therefore A should specialize in cloth and B in wheat if they live close to each other. But it may still be better for both to be self-sufficient if it’s costly to transport the goods. Example of comparative advantage and transport costs: Possible production per day if each person spent all his/her time on each good: Wheat Cloth Person A 3 2 Person B 2 8
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4 Can persons A and B trade so that both are better off? (Assume that trade must be voluntary—note, it wasn’t in the Roman Empire or in the Soviet Union.) Assume that the cost of transporting either good is .25 per unit. Person B has a comparative advantage in production of cloth and person A in production of wheat. Why? Proposed bargain that makes them both better off: Person B specializes in cloth and Person A specializes in wheat. Person B sends 4 units of cloth to A and 4 - .25(4) = 3 arrive. Person A sends 1.5 units of wheat to B and 1.5 - 1.5(.25) = 1.125 arrive. So after trade, each has: Consumption with trade: Wheat Cloth Person A 1.5 3 Person B 1.125 4
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5 Consumption without trade (assume that each spends half of the time on each good): Wheat Cloth Person A 1.5 1 Person B 1 4 Both are better off with trade. The result is one specializes in cloth and the other in cloth production. This is necessary but not sufficient for cities to develop. By itself, comparative advantage only means that scattered households specialize in producing one good or the other.
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6 What else is needed for cities to develop?—agglomeration economies Agglomeration economies refer to increases in the efficiency of production when it occurs in a single city, either in one large factory or many small ones. Factors that increase agglomeration economies:
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This note was uploaded on 06/30/2009 for the course ECON 135 taught by Professor Staff during the Spring '08 term at UCSD.

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econ 135 fall08 lecture1 - Urban Economics Lecture 1...

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