Econ 366 - Chapter 6 (Part 1)

Econ 366 - Chapter 6 (Part 1) - Chapter 6 Theoretical...

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Chapter 6 Theoretical Analysis of Urban structure
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Introduction A major determinant of production location within an urban area => extent to which large amounts of capital and labor can be economically combined with small amounts of land. Goods and services are produced downtown if their production functions permit the substitution of capital and labor for land. If not goods and services are produced in the suburbs or (agriculture) outside urban areas. Further, goods and services produced both downtown and in suburbs are produced with much higher ratios of nonland to land inputs in the downtown than in the suburbs
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Urban area with a single industry Region with a comparative advantage in production of a commodity which is exported from a certain point in the region (port or railhead) Production must be shipped to export point => so production as close as possible to the export point is an advantage. Not only does this economize on transportation of the product but material inputs can probably be brought in by the same mode of transportation Circle of radius u – circumference 2 π u, area π u 2 Circle = radians, if φ radians are available at every distance, the supply of land for production within u miles is ( φ/229 u 2 sqmiles φ < 2π. Chicago – straight line waterfront φ = π
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Production conditions 1. Only one commodity is produced in the urban area 2. production must be shipped to the export point. 3. The demand is a function of the price at the export point 4. commodity is produced with land and capital (no labor) 5. production function has constant returns to scale (inputs and outputs can be doubled for a building by constructing an identical building adjacent to it) 6. capital can be substituted for land but with a diminishing marginal returns to the use of additional capital for a fixed amount of land.(higher stories must provide for stairs/elevators so some space is lost). Diminishing returns are kept low.
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7. competitive output market (all units sold at same price at the point of export wherever they are produced) 8. competitive input market (rental rate same throughout urban area), 9. land rents are determined by the model and depends on the distance from the point of export 10. shipment costs from any production location depends on straight line distance from point of export (although shipments follow road networks, transportation time and distance are strongly correlated with straight line distance) 11. Dependent variables : amounts of capital employed in different plots, rental rates on various plots, total output and price of commodity
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Profit Maximization : Producers use capital and land upto the extent that VMPs of inputs are equated to their rental rates (1) MPK (u)[p – tu] = r
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This note was uploaded on 09/26/2009 for the course ECON 366 taught by Professor Sengupta during the Fall '08 term at USC.

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Econ 366 - Chapter 6 (Part 1) - Chapter 6 Theoretical...

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