Rural & Urban Econ-Ch 1

Part I: Rural and Urban Economics
PART ONE
Market Forces in the Development of Cities
In a market economy, individuals exchange their labor for wage income, which they
use to buy consumer goods and services. How do these market transactions affect cities? In
this part, I will explains that cities exist because there are economies of scale in the
production of some goods and services, and why some cities are big and others are small,
focusing on the rationale for firms to cluster in cities. On the other hand, shows how the
location decisions of firms and households determine where cities develop and explores the
market forces behind the development of a hierarchical system of determinants of urban
economic growth and explains some of the techniques used by economists to predict
employment growth.
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Adapted form Arthur O Sullivan
By Aj.Suthep Nimsai
Economics Major, Mae Fah Luang University
e-mail: suthep@mfu.ac.th
CHAPTER 2
Why Do Cities Exist?

Man is the only animal that makes bargains: one dog does not change
bones with another dog.
__Adam Smith
Cities exist because it is efficient to produce some goods on a large scale. An activity
is subject to economies of scale if the average cost of production decreases when we scale up
the operation and produce more output. The way to exploit economies of scale is to
concentrate production at a small number of sits. Because workers can economize on travel
time, cities develop around these production sits. One of the folk theories of urban economics
is that if there were no economies of scale, there would be no cities. In this case, every
household would be self-sufficient, producing its own goods and services in its own home.
These would be no reason for cities because the cost of urban living (e.g., a high price of
land) would not be offset by any benefits. As well see in this chapter, cities exist because the
benefits associated with concentrated production more than offset the costs of living in a high
population density.
A REGION WITHOUT CITIES
Under what conditions would a region have no cities? In other words, what set of
assumptions guarantees a uniform distribution of population? In this section, we develop an
economic model that generates a region without cities. This model provides a list of
assumptions that together preclude the development of cities. Later in the chapter, we will
relax these assumptions, and the new model will then predict that cities will develop.
Consider a region that produces and consumes two goods: shirts and bread. People
use land to grow raw materials (wool from sheep and wheat) and take time to transform the
raw materials into shirts and bread. Travel within the region is by foot: Residents walk at a
speed of eight miles per hour (four round-trip miles per hour). The following assumptions
together preclude urban development.
1. Equal productivity. All residents are equally productive at producing bread and
shirts. Similarly, all land is equally productive in the production of raw materials.
2. No scale economies in production. Production is subject to constant returns to
scale; a worker produces one shirt per hour, regardless of how many shirts he or she makes.
Similarly, the amount of bread produces per hour is independent of the volume produced.
3. No scale economies in transportation. The transport cost per unit shipped per
mile is independent of the volume shipped.
These assumptions eliminate the possibility of trade. Every household in the region
will produce its own bread and shirts. Because every household is equally productive in
producing both goods, these are no advantages from specialization and trade. Although you
could specialize in bread and exchange your surplus bread for shirts produced by someone
else, you are just as efficient as everyone else in producing shirts, so there is no advantage
from specializing and trading. The disadvantage of trade is that it takes time away from
production. Moreover, there are no economies of scale, so each person will produce one shirt
or one loaf per hour, regardless of how much he or she produce. Therefore, it would not be
sensible to build a shirt factory or a bakery to produce on a large scale. Again, the
disadvantage of centralized production is that trade takes time away from production. To
summarize, there are no advantage from trade or centralized production, so every household
in the region will be self- sufficient.
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In this case, the population will be distributed uniformly throughout the region. To
see the reason for the uniform concentration, consider what would happen if there were a
concentration of population at some location in the region. The higher demand for land at that
location would bid up the price of land, and households living in the concentration would be
worse off than those living elsewhere. In response, the households in the concentration would
move to places with lower land prices. In this equilibrium, there would be a uniform price for
land and a uniform population density. There would be costs from concentrated production
(higher land prices), but no benefits, so there would be no cities.
TRADING CITIES
Our model of the region without cities assumes that all households are equally
productive in the production of shirts and bread. In this part of the chapter, well relax this
assumption and show that comparative advantage may lead to the development of trading
cities. Historically, trading cities developed to facilitate trade between people in different parts
of a region.
Comparative Advantage Generates Trade

In our model of the region without cities, we assume that all household are equally
productive in the production of shirts and bread. If this assumption is relaxed, one part of the
region may have a comparative advantage in shirt production, and the other part may have a
comparative advantage in bread production. It is possible ---but not certain---that comparative
advantage will cause specialization and trade.
The notion of comparative advantage can be explained with a simple numerical
example. Suppose that the northern half of the region is more productive than the southern
half. In table 2-1, the North has an absolute advantage in producing both bread and shirt;
northern residents produce twice as much bread per hour and six times as many shirts per
hour. The differences in productivity could be caused by differences in labor skills, weather,
or natural resources.
The notion of comparative advantage is based on the principle of opportunity cost. In
a one-hour period, a northern worker can produce either six shirts or two loaves of bread.
Therefore, the opportunity cost of a shirt is one third loaf, and the opportunity cost of bread
is three shirts. A southern worker can produce either one loaf or one shirt, so the opportunity
cost of bread is one shirt, and vice versa. The North has a comparative advantage in the
production of shirts because the opportunity cost of shirts is one-third loaf of bread, compared
to one loaf in the South. Similarly, the South has a comparative advantage in bread because
its opportunity cost of one loaf of bread is one shirt, compared to three shirts in the north.
Comparative advantage may lead to trade between the North and South. To explain
the possible advantage of trade, suppose that all households in the region are initially selfsufficient. Suppose the exchange rate is two shirts per loaf of bread; that is, the price of bread
is two shirts. If both regions move in the direction of specialization, both can get more goods
to consume. As show in the first row of Table 2-2, if a northern household switches one hour
of work from bread production to shirt production, it produces six additional shirt but two
fewer loaves of bread. If a southern household switches three hours from shirt production to
bread, it produces three more loaves but three fewer shirts. As show in the second row of
numbers, given the exchange rate of two shirts per loaf, the northern household can exchange
its six extra shirts for three loaves of bread from the southern household. On the flip side, the
southern household exchange its three
Table 2-1 Comparative advantage
Output per Hour
South
North
Bread
1
2
Opportunity Cost
South
North
1 shirt
3 shirts
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By Aj.Suthep Nimsai
Shirts
1
6
1 loaf
1 /3 loaf
Table 2-2 Specialization and the Gains from trade
North
South
Bread
shirts
Bread
Shirts
Change in production
-2 loaves
+6 shirts
+3 loaves
-3 shirts
Exchange 2 shirts per loaf
+3 loaves
-6 shirts
-3 loaves
+6 shirts
Net effect of change in +1 loaf
0
0
+3 shirts
production and exchange
Extra loaves for six shirts. As show in the last row , the northern household has a gain of one
loaf of bread, while the southern household has a gain of three shirts. In this case, each
household benefit from a move toward specialization in the good for which it has a
comparative advantage.
What about transportation costs? Trade between the two households will be beneficial
if the transportation cost involved in trading arent too large. Suppose that it take an hour to
execute a trade. For the northern household, the opportunity cost of the hour spent trading is
the amount of bread the household could produce for itself during this time. The opportunity
cost is two loaves so it would not be sensible to trade. If, however, the travel time is less than
a half hour, the household would have a net gain from trade. For example, it the trade takes
only one-fifth of an hour, the opportunity cost is four- tenth of a loaf, leaving a net gain of
six-tenths of a loaf. Similarly, the southern household would have a net gain. Therefore,
households in the two regions will specialize and trade, exploiting their comparative
advantage to increase consumption.
Although there is now specialization and trade, there will not be any cities. Given the
fourth assumption ( no scale economies in transportation) , household in the two regions will
engage in direct trade. Each northern household will link up with a southern household to
exchange shirts and bread. There is no reason for an intermediary because individual can
transport goods as efficiently as someone who transport goods in bulk.
Scale Economies in Transportation and Trading Cities
We can extend the model to incorporate scale economies in transportation. Suppose
the transport cost per unit per mile decrease as the volume transported increases. In this
case , it will be chapter to transport shirts and bread in bulk, and it will be sensible for
individual household to rely on intermediaries ( middlemen or middle folks) to collect,
transport, and distribute shirts and bread. From the perspective of individual household. It
will be sensible to pay middle folks some amount of bread to transport the goods, freeing up
time to produce more output. For the northern household, paying the middle folks one-tenth
of a loaf would be better than spending one-fifth of an hour ( at a cost of 0.4 loaves)
transporting the bread and shirts. Similarly, the southern household would be better off paying
something less than one-fifth of a shirt to have someone else take care of transportation.
To fully exploit scale economies in transportation, a trading firm must collect and
distribute a large volume of output. A trading firm will locate at a place convenient for the
collection and distribution of goods, causing the development of marketplaces at crossroads,
ports, river junctions, and other transshipment points.
The location decisions of traders cause the development of market cities. People
employed by the trading firms will live near the marketplace to economize on commuting
costs, and will bid up the price of land near the marketplace. As the price of land increase,
residents will economize by occupying relatively small lots. In other words, the population
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density around the marketplace will be higher than in the rest of the region. A city is defined
as a place with a relatively high population density, so the combination of comparative
advantage and scale economies in transportation cause the development of a market city.
The market city develops because three conditions are satisfied. First, productivity is
high enough that people outside the city produce enough bread and shirts for themselves and
the urban traders. The agricultural surplus feeds and clothes the urban workers. Second, the
differences in productivity that generate comparative advantage are large enough to offset
transportation costs, so trade occurs. Third , there are scale economies in transportation,
meaning that intermediaries ( middle folks) are more efficient at transporting and marketing
goods, generating central marketplaces.
Historical Insights: The English Woolen Industry
Before the Norman Conquest in 1066, the making of wool cloth in England was an
entirely local affair. Individual household and villas raised their own sheep, spun the raw
wool into yarn, and wove the yarn into cloth. In other words, households were self-sufficient
in cloth. A small number of towns and cities were involved in local trade.
The Norman Conquest increased the interaction between England and the continent,
setting the stage for the development of the woolen cloth trade. The barriers to trade fell, and
England was able to exploit its comparative advantage in the production of wool cloth.
Exports to the continent rose, causing the development of small cities and towns based on the
cloth trade.
FACTORY CITIES
The third assumption underlying the region without cities is the constant returns to
scale in production. Specifically, each worker can produce either one shirt or one loaf of bread
per hour, regardless of how much the worker produces. There are no advantage from
centralized production in factories, so all goods will be produced in home. If we drop the
assumption of constant returns to scale and introduce scale economies in the production of
shirts, factory production may replace home production, causing the development of factory
cities.
Scale Economies and the Shirt Factory
Suppose that there are advantage from the large- scale production of shirts. In other
words, as the volume of production increase, the labor required to produce one shirt decrease.
Figure 2-1 shows the average labor times for different amount of factory shirts. The average
labor time decrease from one hour for one shirt ( the same time as home production) to onefourth hour for an output of 400 shirts. These scale economies arise for two reasons.
Figure 2-1 scale Economies in Shirtmaking
Labor time per shirt
Average labor time

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Number of Shirts
If there are scale economies in shirt making, the average time required to make a shirt decrease as the
volume produced increase.
1. Factor specialization. A home worker performs all the tasks associated with making a
shirt: the raw wool is spun into yarn; the yarn is woven into cloth; the raw cloth is finished;
the prices of the finished cloth are sewn into a shirt. A large operation allows labor
specialization with each worker being assigned a single task; there could be spinner, a weaver,
a finisher, and a sewer. The specialization of labor increase productivity because (a) a
workers productivity increases with repetition and (b) a worker spends less time switching
from one production task to another.
2. Individual inputs. An input to the production process is indivisible if the input has a
minimum efficient scale. If an indivisible input is cut in half, the total output of the two halves
is less than the output of the whole. The shirt factory used equipment ( spinning machines,
power looms, and sewing machines) that cannot be efficiently scaled down for use by
individual shirt makers. As output increase, the factory uses more indivisible inputs,
increasing productivity.
If the shirt factory produce 400 shirts per day, it will employ 100 workers, each of
whom produce four shirts per hour.
What about the wage of factory workers and the price of a shirt ? the wage must be
high enough to make shirt workers indifferent between working in the factory and working at
home. Recall that a home worker can produce one loaf of bread per hour. To make the shirt
worker indifferent, the wage must be one loaf of bread per hour of factory work. To keep
the example simple, suppose that there are no other costs of producing shirts. Because each
worker produces four shirts per hour, and is paid one loaf, the firms production cost per shirt
is 0.25 loaf of bread.
Under what circumstances will a household buy factory shirts instead of producing
them at home? The net price of a factory shirt is the price paid to the firm (0.25 loaf) plus the
consumers opportunity cost of the time spent traveling to and from the factory. The
opportunity cost is the loss of bread production resulting from traveling instead of producing
bread. A household can produce one loaf per hour, so it will be sensible to buy a factory shirt
if the trip takes less than 0.75 hour. For example, if the trip takes only 0.20 hour, the net
price of a factory shirt is 0.45 loaf =0.25 loaf paid to the factory plus 0.20 loaf sacrificed in
travel time. The household will be indifferent if travel time is 0.75 hour ; in this case, the net
price is 1 loaf = 0.25 loaf paid to the factory + 0.75 loaf for travel.
Figure 2-2 shows the market area of the shirt factory. The market area is defined as the area
over which the factory under prices home production. The vertical axis measures the net
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Figure 2-2 Market Area of Shirt Factory
The market area of the shirt factory is the area which the net cost of a factory shirt (production
time plus travel time) is less than the production time of a homemade shirt (1 hour)
Price of shirts, the sum of the factory price (0.25 loaf) and travel time to the factory. The
horizontal axis measures the distance to the factory in miles. If walking time is eight miles
per hour ( four round- trip miles per hour) , the factory will under price homemade shirts for
residents within three miles of the factory ( within 0.75 hour walking time). Therefore, the
factorys market area is a circle with a radius of three miles.
A Factory City
A small urban area will develop around the shirt factory. The shirt workers will live
near the factory to economize on commuting costs, and will bid up the price of land near the
factory. As the price of land increase, workers will economize on land by occupying smaller
lots. On other words, the population density around the shirt factory will be higher than the
population density, so the factory cause the development of a small factory city.
The factory city develops because two conditions are satisfied. First, agricultural
productivity is high enough that workers outside the city can generate enough food to feed
themselves and have enough left over to feed the shirt workers on the city. Second , scale
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economies are large relative to travel costs, so the shirt factory can under price homemade
shirts, at least for people living near the factory.
Limits to Cities Size : Freight Cost and the Railroad
The population of the city is determined by the number of factory workers. Which
in turn depends on the total output of the factory. For a given level of economies of scale,
the size of the city is limited by the cost of moving output from the factory to consumers in
the region. In our model, the consumer incurs these freight costs by traveling between the
home and the factory. But the same logic would be applicable if the firm were responsible for
freight costs. The cost of transporting goods limits the ability of the factory to exploit
economies of scale in production.
To illustrate the notion that freight cost is a limit on city size, consider the effect of
increasing the speed of travel within the region. Suppose the travel speed doubles to 16
miles per hour ( eight round trip miles per hour). Recall that the factory can under price home
production if the travel time is less than 0.75 hour. Therefore, with a travel speed of 16 miles
per hour, the factory can under price home production over a six-mile radius. In other words,
a doubling of travel speed would double the radius of the factorys market area. A doubling
of the radius will increase the output of the factory, increasing in freight cost allows the
factory to more fully exploit economies of scale, increasing city size.
During the industrial revolution, innovation in intercity transportation contributed to
specialization, trade, and urbanization. The railroad decreased the cost of moving goods
between regions, decreasing the delivered price of both agricultural and factory goods.
Before the railroad linked eastern cities with the western parts of the United States, a large
fraction of the food consumed in New England was produced by the regions farmers.
Similarly, a large fraction of the goods consumed in the west ( e.g., shoes) was produced by
local craftsmen. The railroad cut freight costs, so eastern factories could under price western
craftsmen and western farmers could under price eastern farmers. As a result, both regions
specialized to a greater extent and trade increased. The increased in the output of factories in
New England increased the size of its factory cities.
Limits to Cities Size: Scale Economies and the Sewing Machine
The other limit to the size of the factory city is the extent of scale economies in
production. As economies of scale become more powerful, the cost of factory production
decrease relative to the cost of home production, and the market area of the factory increase ,
increasing the size of factory cities.
The sewing machine, which was developed in the middle of the nineteenth century,
increased scale economies in the making of clothing and contributed to the development of
cities. Around the beginning of the nineteenth century , about four-fifths of the clothing worn
in the United States was hand- sewn in the home for members of the household. The other
fifth was hand- sewn by tailors. The sewing machine allowed factory producers to under
price home producers, and by 1890 nine-tenths of U.S. clothing was being made in factories.
As clothing factories sprang up in the United States, new cities developed around the
factories.
The sewing machine also contributed to the development of U.S. cities around shoe
factories. Before 1700, most shoes were produced in the home or the local village. The cost of
transportation was so high that local production was efficient. Over time, transportation costs
decreased, allowing the exploitation of comparative advantage in shoe production. The
putting-out system was implemented in the 1700s: shoe producers distributed raw materials
to cottage workers, collected their output, and finished the shoe in a central shop. As new
shoemaking machines. The McKay sewing machine mechanized the process of sewing the
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soles to the uppers, increasing scale economies in shoe production to the point that the central
shops became genuine factories. Cities developed around the new shoe factories.
LIMITS TO CITY SIZE: COMMUTING COSTS
Up to this point, we have implicitly assumed that the wage paid to factory workers is
independent of city size. Each worker is paid one loaf of bread per hour of factory work,
regardless of the size of the city. In fact, the wage paid to factory workers will increase as
the city grows because bigger cities have longer commuting times. The factory must
compensate workers for longer commutes, so the wage will increase as the city grows. As the
wage increase, so does the cost of factory shirts relative to the cost of homemade shirts.
Table 2-3 Commuting Time, Wage, and Prices
Number of workers Commute Time
Work Time
100
O hours
8 hours
20,000
4 hours
4 hours
Hourly Wage
1 loaf per hour
2 loaf per hour
Wages Increase with City Size

To illustrate the effects of commuting costs on wages and price of factor shirts,
consider a factory city where each worker has eight hours per day to divide between
commuting and factory work. Each hour spent commuting decreases work time by one hour.
To be indifferent between producing bread at home and being employed in the factory
( involving both commute and work times), the worker must be paid eight loaves of bread
for each day of work and commuting.
We can use the simple example shown in Table 2-3 to show why wages increase with
city size. Suppose that in a small city of 100 workers, commuting time is zero: every worker
lives within a short walk of the shirt factory. Each worker spends eight hours in the factory
and earn s eight loaves per day. Which translates into one loaf per hour of factory work. At
the other extreme, suppose that in a city with 20,000 workers, commute time is four hours
per day, leaving only four hours for factory work. To keep the worker indifferent between
factory work and home production of bread, the firm must still pay the worker eight loaves
for a day of working and commuting. On an hourly basis, the wage is now two loaves of
bread per hour of factory work ( eight loaves divided by four hours). In other words, because
the larger city has commuting cost, it has a higher hourly wage.
Figure 2-3 shows the relationship between city size and wage, using the two extremes
shown in Table 2-3. the hourly wage rises from one loaf per hour in the small city to two
loaves per hour in the city with 20,000 workers.
What are the implications of higher wages for the shirt producer and the factory city?
The higher the wage, the higher the population cost for factory shirts and the higher the
price of factory shirts. Recall that the market area of the factory is defined as the area over
which the net price of factory shirts ( the factory price plus travel costs incurred by the shirt
buyer ) is less than the cost of homemade shirts. As a city grows, rising wage will raise the
factory price of shirts relative to the cost of homemade shirts. In other words, higher
commuting costs will limit the market area of the factory and the size of the city.
Decrease In Commuting Cost and the Boston Experience
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Because commuting costs limit city size, a decrease in the unit cost of commuting
will cause a city to grow. Suppose the citys commuting speed were to double . in Table 2-3 ,
the commute time associated with a city of 20,000 workers would be cut in half, reducing
workers commuting time, wage, the cost per shirt, and the price of factory shirts. As the
factory price decrease relative to the cost of homemade shirts, the market area of the factory
will increase, increasing the number of factory workers and the size of the city.
Figure 2-3 The Wage Increase with City Size
Wage in loaves of bread
Wage (loaves per hour)
Number of worker (thousands)

The wage increase with the size of the citys workforce because the larger the workforce, the
longer the commuting distance for workers.
The city of Boston provides a good example of the effects of changes in transit
technology on city size. One rule of thumb is that a city should be small enough that the
typical resident can travel from the edge of the city to the city center in an hour. In 1850,
Boston was a walking city with a radius of about two miles. In the 1860s, the horsepowered railroad (horses pulling cars along rails) war introduced, and the radius of the city
increased to 2.5 miles in 1872 and 4.0 miles in 1887. by the 1890s, the horse railroad was
replaced by the electric trolley, which traveled at twice the speed and carried three times as
many passengers. As a result, the radius of the city increased to about six miles. In the 40
years during which walking was replaced by the trolley, the radius of the city tripled and the
land area increased ninefold.
HISTORICAL INSIGHTS: A BRIEF HISTORY OF WESTERN URBANIZATION
We can use the concepts developed in this chapter to provide some insights into the
historical development of cities in the Western world. Weve seen that trading cities develop
when comparative advantage is combined with scale economies in transportation. And
factory cities develop when there are scale economies in production. This part of the chapter
takes a historical perspective, discussing how changes in technology caused cities to grow and
shrink, and eventually caused urbanization around the world.
The first cities
The first cities developed in the fertile river valleys in the Near East around 3000
B.C. the city-states that developed in the Mesopotamia Valley included Eiridu , Ur, Lagash,
and Kish. Ur was the largest of these cities. With a land area of about 150 acres and a
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population of about 25,000. in 2000 B.C., the city of Babylon had a population of about
50,000. these cities developed shortly after a number of agricultural breakthroughs generated
a surplus of food, allowing some people to pursue nonagricultural activities in cities. Among
the innovations were the domestication of grain, the development of irrigation systems, and
the plow ( replacing the hoe). According to Davis (1976), between 50 and 150 farmers were
required to support a single city inhabitant.
Why did the first cities develop? There is some uncertainty about the social and
economic features of early societies, so historians can only speculate about the origins of
cities. Most agree that the first cities served both religious and defensive purposes. Can the
development of defensive and religious cities be explained by the same factors that explain
the development of market-based cities?
Consider first the defensive city. A farmer who generates an agricultural surplus will
eventually use the surplus, either consuming it himself or trading it for other goods. In either
case, he must store the surplus food for some period of time. The stored food provides a
lucrative target for thieves. If there are scale economies in foods storage and protection,
farmers may be better off storing their surpluses in a central storage facility rather than a set
of facilities, one for each farmer. The people working in the fortified storage facility
( managers and guards) will live near the facility, generating a place with a relatively high
population density, a small city. This is the theory of the defensive city : the first cities
developed because of scale economies in the storage of the agricultural surplus. Support for
the theory comes from archaeologists who uncovered the remains of fortified storage
facilities in the first cities.
Consider next the religious city. According to Mumford (1961), the development of
the first cities coincided with the development of large scale religion. Before the
development of cities , most people worshipped in small groups, either in the home or in the
local village. Around the time that the first cities developed, the local earth gods were
replaced by celestial gods. Who may have demanded worship on a grander scale. If adoration
and supplication were considered more effective on a large scale, a doubling of the size of the
shrine would more than double the religious output. The small shrines in homes and villages
were replaced by large temples at central locations, which employed chieftains, priests, and
religious workers, and caused the development of a place with relatively high population
density, a city. This is the theory of the religious city: the earliest cities developed because of
scale economies in the provision of religion. Support for the theory comes form
archaeologists who uncovered the remains of large temples in the first cities.
The most prominent feature of the early city was a large temple at the city center, a
site for worship and the storage of the agricultural surplus. Which came first, the central
storage facility or centralized religion? Perhaps the central storage facility made worship in
the central temple more convenient, causing the switch to centralized religion. Alternatively,
the development of a large temple could have provided a convenient and defensible storage
facility for the agricultural surplus. In other words, there were economies of scope in the
provision of religion and defense: the two services were provided more efficiently if they
were provided together. A third possibility is that the local chieftains used centralized
religion as a subterfuge to extract the agricultural surplus from local farmers.
The military played a major role in the early cities. The development of cities
increased the frequency and severity of human conflict for two reasons. First, the cities
worshipped different gods and fought wars to settle religious disputes. Second, the urban
societies accumulated wealth, providing lucrative targets that encouraged materialistic wars.
Although cities encouraged aggressive behavior, they also provided the most effective
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defense against aggression. Until the development of gunpowder in the fourteenth century, the
most effective defensive maneuver was a large but simple wall. In addition, a city contained
enough people to defend itself against attack from large forces. Once the simple wall was
built, there was safety in numbers.
Greek and Roman Cities
The next stage of western urbanization occurred in Greece. in 500 B.C. there were
hundreds of independent city-states ,ranging in population from a few hundred to tens of
thousands. Athens was the largest, with a population of about 150,000, and Sparta had a
population of about 40,000. in contrast with earlier cities, which were controlled by chieftainpriests, most Greek cities were run by their citizens, using public assemblies to make policy.
Athens was a market city, with trading activity centered in the Agora. Early in its
history, the city established independent colonies and traded its household crafts and olive
products for food and raw materials from the colonies. Trade was facilitated by the stamping
of gold and silver coins in the seventh century B.C. in this early period, Athens fed itself
through voluntary trade with other areas.
The Athenian empire developed in the aftermath of the successful war against Persia
in the fifth century B.C. after the Greek city-states repelled the Persian invasion, they formed
the Delian League to carry the war into Asia Minor. By the end of the successful campaign,
Athens had assumed complete control of the league, dictating policy to the other city-states.
Athens took control of the treasury, transforming the voluntary contributions of the member
city- states into payments of tribute to Athens. The system of homage and tribute led to the
Peloponnesian War between the Athenian Empire and Sparta (431 to 404 B.C.). the war ended
in 404 when Athens renounced control over its empire and demolished its defensive walls.
Athens never regained its former power. Eventually, Philip of Macedonail was able to take
advantage of the weakened city-states and expanded his kingdom to include most of Greece.
The next stage of western urban development occurred under the Roman Empire. By
the third century A.D., Rome had a population exceeding one million. The Romans set up
colonies to the north and west, establishing colonial cities throughout Europe. Rome fed its
large population with a combination of trade and tribute, with tribute playing a relatively large
role.
The Roman cities were eventually overrun by marauders from rural areas. According
to Hohenberg and less (1985), the Roman economy emphasized the collection of the
agricultural surplus and neglected production activity. Instead of exchanging urban goods for
agricultural products, Rome used conquest and tribute to feed its population. In the fourth
and fifth centuries, German tribes invaded from the north, disrupting the Roman collection
system. It appears that there was little interest outside of Rome in restoring the trade
routes, so the losses from successive invasions were cumulative. If Rome had relied to a
greater extent on voluntary exchange, the colonies might have been more interested in
maintaining the exchange network, and the Western empire might have recovered from the
Germanic raids.
What are the lessons from the rise and fall of Athens and Rome? Early in its history ,
Athens engaged in voluntary trade with other areas, exchanging urban goods for food from
the countryside . the city thrived under this system of voluntary exchange. The Athenians
eventually switched to a system of conquest and tribute, resulting in war and the decline of
the city. Mumford (1961) suggests that the city of Rome should have been called
Parasitopolis to indicate the extent to which its population lived off the labors of outsiders.
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The decline of Rome was caused in part by the disruption of its collection system by the
Germanic raids. Perhaps the lesson is that cities based on voluntary exchange are viable, but
cities based on coercive transfer payments are not.
Feudal Cities
In the first few centuries following the fall of the Roman Empire, cities in the West
declined. The Islamic conquest disrupted trading on the Mediterranean, causing the decline of
many port cities. Waves of marauding barbarians continued to sweep across Europe, making
travel and trade dangerous. People sought safety inside city walls, where, once again there
was safety in numbers.
The feudal economy of the eleventh through the fourteenth centuries was based on
manorial estates and small walled cities. On the manor, the lord inherited his serfs, who
worked the lords land and served in the military in exchange for the use of a small plot of
land. In the small towns, workers produced handicrafts ( cloth, leather goods, meter goods).
Which they exchanged for the agricultural surplus of the manor. Cities in the feudal era were
small and numerous. In the eleventh century, London was the largest city in England, with a
population of only 16,000. there were several other English cities with populations of around
5,000. the largest of the many German cities had a population of no more than 40,000.
The largest cities served the Byzantine Empire and the Muslim areas of Spain. Venice
was one of the few large cities beyond the Byzantine and Muslim areas, but it depended
heavily on trade with the Eastern Empire. During the eleventh and twelfth centuries, the
Italian city- states forged agreements with the Byzantine and Islamic rulers for trade with
North Africa and the East. The Europeans traded wood, iron, grain, wine, and wool cloth for
medicines, dyes, linen, cotton, leather, and precious metals. The increased trade contributed to
the growth of Venice, Genoa, and Pisa.
Between the eleventh and fourteenth centuries, the frequency of barbarian invasions
decreased, and the small defensive cities gradually became market cities. The medieval cities
specialized in commerce and handicrafts, and thus earned---rather than robbed---- The
agricultural surplus of their hinterlands. A small merchant class developed, and market
places were established just outside the city walls, the merchants were protected from
plunder by they establishment of weekly market days: Once a week, theft was outlawed in
places marked by the market cross. The market peace was enforced by local chieftains,
special courts with jurisdiction over traders, and the church. The markets flourished, and the
city walls were extended to include the marketplaces. The urban market was primarily a place
for the exchange of local agriculture and handicrafts. The producers of handicrafts made up a
large fraction of the citys workforce.
Hohenberg and Less (1985) use Leicester, in the East Midlands of England, as an
example of a medieval city in the fourteenth century. The city was surrounded by walls on
three sides and a river on the fourth. The town ditch was just outside the wall. The city was a
regional marketplace, serving as a commercial center for the surrounding country. The city
produced staples such as beer and bread for local consumption and produced woolen cloth for
export. Occupations in the city included butchers, shoemakers, tailors, mercers, weavers , and
bakers. Over half of the citys workers were employed in manufacturing, with the other half
employed as food makers (25 percent), traders and merchants ( 10 percent), builders ( 5
percent ), and other occupations. The merchant guild controlled most economic activity in the
city.
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According to Davis ( 1976), the first market-based cities developed for two reasons.
First, power in the feudal system was decentralized. Unlike the Greek and Roman cities,
medieval cities could not simply dominate their hinterlands and demand tribute, but had to
produce something in exchange for agricultural goods. Second, agricultural productivity was
relatively low, so a city could not survive on the output of its immediate hinterland, but had
to trade with a relatively large area. As a result, the city had to develop products that could
compete with homemade products in its hinterland and products produced in other cities.
Competition among the medieval cities caused innovations in production and
commerce. Urban producers developed new production techniques, allowing them to under
price their competitors. Cities invested in secular education as a means of promoting literacy
and developing commercial skills. These early efforts to improve the techniques of
production and commerce set the stage for the industrial revolution of the eighteenth and
nineteenth centuries.
Mercantile Cities
Starting in the fifteenth century, large mercantile cities developed in Europe. One
factor in this development was the transfer of power from a large number of feudal lords to a
relatively small number of princes, queens, and kings. The shift in power was caused in large
part by military advances that rendered the traditional feudal defense maneuvers obsolete.
Innovations in warmaking increased the seriousness and scale of conflict. The feudal
lord used his serfs as part- time warriors. If these warriors could not defeat the attackers in
the field, the feudal lord could always hunker down behind his castle walls to wait out a
siege. The professional army of the fifteenth century combined infantry ( armed with pikes,
crossbows, and muskets) with siege cannons and cavalry. The professional soldiers, with their
sophisticated weapons, usually defeated the feudal lords part-timers in the field. When the
lord retreated to his castle, the siege cannons blew holes in the castle walls. The professional
armies defeated the feudal lords, centralizing power in the hands of princes, queens, and
kings. In response, mercantile cities built intricate fortifications and also hired professional
soldiers. The larger cities were able to exploit the increased scale economies in defense.
The centralization of power caused the centralization of administrative and military
functions in royal cities. After the sixteenth century, the most rapidly growing cities were the
ones that harbored a royal court. In a short period of time, more than a dozen cities grew to a
size attained by only a few medieval cities: London had 250,000 people, Naples 240,000,
Milan 200,000, and Paris 180,000 ; cities with around 100,000 inhabitants included Rome,
Lisbon, Palermo , Seville, Antwerp , and Amsterdam.
A second factor in the growth of mercantile cities was long-distance trade. The
consolidation of power eliminated local tariffs imposed by feudal lords and trade increased.
The development of ocean travel led to exploration and the discovery of new markets. Cities
developed along trade routes and at transshipment points. While cities with river and seaports
flourished ( Naples, Palermo, Lisbon, and Liverpool) , inland cities like Florence declined.
Urbanization during the Industrial Revolution
Despite the rapid spread of cities between 3000 B.C. and 1800 A.D., the world
continued to be predominantly rural . Urbanization was limited by the relatively low
productivity of agriculture, the high costs of transporting goods ( which limited the volume of
trade), and the relatively small advantages of centralized production. Until the early part of
the nineteenth century, the fraction of the worlds population living in cities was only about 3
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14
percent . between 1800 and 1970, the percentage of the population in urban areas increased to
39 percent. In the United States, the percentage of the population in urban areas increased
from 6 percent in 1800 to over 75 percent in 1990.
The rapid urbanization of the last two centuries was caused by the industrial
revolution, which started in nineteenth century. The industrial revolution produced
innovations in manufacturing and transportation that shifted production from the home and
the small shop to large factories in industrial cities. Between 1700 and 1900, Manchester,
Birmingham, Glasgow, and Liverpool grew from tiny towns into giant industrial cities. The
innovations of the industrial revolution can be divided into four areas: agriculture,
manufacturing, transportation, and construction.
The rapid urbanization of the industrial revolution was made possible by innovations
that increased agricultural productivity. Farmers substituted machinery for muscle power and
simple tools, increasing the output per farmer. For example, using a horse-drawn reaper, two
people could harvest the same amount of gains as eight people using traditional harvesting
methods. In addition, the development of agricultural science led to innovations in planting,
growing, harvesting. And processing. As productivity increased, laborers were freed from
food-raising responsibilities, allowing them to pursue other activities. In the United States ,
the share of employment in agriculture decreased from 69 percent in 1840 to 2.8 percent in
1988.
Perhaps the most visible part of the industrial revolution involved innovations in
manufacturing. New machines, made of iron instead of wood, were developed for the
production of most goods. Manual production by skilled artisans was replaced by mechanized
production using interchangeable parts, specialized labor, and steam powered machines.
Output per worker rose, and scale economies in production increased. Mass production
decreased the relative cost of factory goods, causing the centralization of production and
employment in large industrial cities.
Innovations in intercity
transportation contributed to industrialization and
urbanization. The steamship and the railroad decreased the costs of moving goods between
cities ,decreasing the delivered price of factory goods. Production became more centralized,
and factory cities grew. The new transportation modes also decreased the costs of moving
agricultural goods, allowing greater regional specialization in agriculture. Agricultural
regions were better able to exploit their comparative advantages, so agricultural productivity
increased. Trade increased because the railroad allowed both regions to exploit their
comparative advantages.
Innovation in construction methods also increased city sizes. The first skyscraper, a
10-story building that housed the Home Insurance Company, appeared in 1885 in Chicago.
The building was revolutionary because its frame was made of steel instead of bricks.
Because the steel frame was relatively light, the building could be taller than the traditional
brick building. The development of the elevator decreased intra building travel costs in tall
buildings. Increasing the feasibility of the skyscraper. The skyscraper increased the intensity
of land use, increasing the citys productive capacity and its feasible population.
Urbanization in the United States
Figure 2-4 shows the trend in U.S. urbanization from 1800 to 1990. in 1800, only
about 6 percent of the population lived in cities. The share of population in cities increased to
15 percent by 1850, 40 percent by 1900, 64 percent by 1950, and 75 percent by 1990.
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The industrial revolution caused dramatic growth in U.S. cities. Between 1850 and
1890, the population of New York and Boston more than tripled; the population of Baltimore
more than doubled; and the population of Philadelphia increased more than eightfold. Further
west, on average, the population of Chicago, Detroit, Cleveland, Pittsburgh, and Los Angeles
increased 18-fold between 1850 and 1890. lurking behind these change were large increases
in urban manufacturing activity. The share of employment in manufacturing more than
doubled in most of these cities, from about 10 percent of total employment to about 20
percent.
Figure 2-4 Percent of U.S. population Living in Urban Areas, 1800-1990
SUMMARY
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1. Employment opportunities are concentrated in cities because some activities are

subject to economies of scale
2. A scale city will develop if (a) the differences in productivity underlying comparative
advantage are large relative to transportation costs and (b) there are scale economies
in transportation.
3. A factory city will develop if scale economies in production are large relative to
transportation costs.
4. City size is limited by the cost of transporting goods ( freight cost) and the cost of
transporting workers within the city ( commuting cost)
5. The first cities developed for defensive and religious reasons.
6. The centralization of power during the mercantile period caused the development of
administrative cities and reduced trade barriers. Combined with efficient ocean travel,
this resulted in the development of trading cities.
7. The rapid urbanization in the nineteenth and twentieth centuries was caused by the
industrial revolution and the associated innovations in agriculture, transportation, and
manufacturing.
EXERCISES AND DISCUSSION QUESTIONS

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1. The table below summarizes the productivity of workers in bread and shirt production
in two parts of region.
Output per Hour
Opportunity Cost
East
West
East
West
Bread
1
5
Shirts
3
6
a. complete the table by providing the opportunity costs of producing bread and
shirts in the East and the West. For which good does the East have a
comparative advantage? What about the West?
b. Assume that transport costs are zero and that the exchange rate is two shirts
for one loaf. If a western household switches one hour from shirt production
to9 bread production and exchange all the additional bread for shirts,
will the household be better off ?
c. Suppose that the time required to execute the trade in ( b) is one hour.
Is trade still beneficial? At what transaction cost ( time per trade) would the
net gain from trade be zero?
d. under what condition will the differences in labor productivity cause the
development of cities?
2. consider a region that has a single trading city, a city developed as a result of
comparative advantage in the production of a homogeneous good ( shirts) and scale
economies in transportation. The shirts produced by different households are perfect
substitutes, and communication between households is costless. Suppose that a matter
transmitter is introduced into the region. The transmitter at no cost transports goods,
but cannot be used to transport people. The transmitter is cheap enough that every
household can purchase one at a relatively low cost.
b. will the matter transmitter cause the trading city to grow, shrink, or
disappear?
c. How would your answer to (a) change if shirts are not homogeneous (i.e.,
shirts from different households are not perfect substitutes)?
3. consider a country with two regions that are separated by a mountain range. Initially,
there are no cities in the country. Suppose that a tunnel is bored through the
mountain, decreasing travel costs between the two regions. Under what conditions
will the tunnel cause the development of trading cities?
4. Consider a region that has a single factory city, a city that developed as a result of
scale economies in production. It is a walking region: People walk to work and to
purchase consumer goods. Suppose pump sneakers are introduced ( selling at the
same price as traditional shoes), doubling walking speeds. Will pump sneakers cause
the factory city to grow, shrink, or disappear?
5. Region F has a single factory city ( a city that developed as a result of scale economies
in production). Suppose that a matter transmitter is introduced into the region. The
transmitter can costlessly transport goods, but cannot be used to transport people.
The transmitter is cheap enough that every household can purchase one at a
relatively low cost. Will the transmitter cause the factory city to grow, shrink, or
disappear?
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6. Consider a region that produces lemons and ice and consumes lemonade ( lemons and ice
together). All resources are distributed uniformly throughout the region, and all people are
equally productive in producing lemons and ice. There are scale economies in the production
of ice, causing the development of an ice factory and a factory city. Suppose that a small
refrigerator is introduced and imported into the region, providing an alternative to the ice
purchased from ice factories. Explain the effects of the refrigerator on (a) the market area of
the ice factory and (b) the size of the city surrounding the ice factory.
7. Consider Retireland, a region where most residents are retired. Residents of the region
consume a single good (food), which is imported from another region and sold in vending
machines. Will there be any cities in Retireland? If so, how will they differ from cities in
regions where most people work?
8. Using the example in Table 2-3 as a staring point, for each of the following events, depict
graphically the effect of each event on the relationship between wages and city size ( shown
in Figure 2-3 ) . then discuss the implications of the event for the size of the factory city. (a)
the work day shrinks to 6 hours ( work time plus commute time is six hours). (b) Commuting
speed doubles. (c) agricultural productivity ( bread production per hour) doubles to two
loaves per hour.
9. Critically appraise: innovation in agriculture during the industrial revolution was a
necessary, but not sufficient, condition for the urbanization of society.
10. Some societies never developed any cities . where did these societies develop? How did
they differ from the societies that developed cities?
11. The Romans auctioned off the rights to tax their colonies to commercial tax collecting
agencies. In other words, the Romans sold franchises to tax collectors. Might this auction
scheme have contributed to the decline of Rome? If you were in change of the franchising
system, what restrictions would you place on the tax collectors ?
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CHAPTER 3
Big and Small Cities
I will tell the story as along of small cities no less than of great. Most of those which were
great once are small today: and those which in my own lifetime have grown to greatness,
were small enough in the old days.
------Herodontus-----as we saw in Chapter 2, cities exist because some activities are subject to economies
of scale. Trading cities develop as a result of scale economies in transportation, while factory
cities develop as a result of scale economies in production. In both cases, the scale economies
are internal to the firm: an increase in the firms output decreased its average production cost.
Based on this simple analysis, we can predict the development of two sorts of small
cities-------small trading centers with a few firms at a marketplace, and company towns with
all workers employed in a single factory.
In this chapter, well see why most cities are not small trading posts or one factory
towns but instead are large and diverse collections of economic activity. When the production
cost of one firm decreases as the output of another firm increases, we say the firm
experiences external economies of scale. The words external indicates that one firm
benefits from the decisions made by other firms, decisions that are external to the firm. These
positive spillovers cause firms to cluster in cities, leading to the large agglomerations of
employment. The external economies increase labor productivity, allowing firms to pay the
higher wages necessary to attract workers to large cities, where commuting costs are
relatively high. Many of the ideas in this chapter are discussed in Jacobs (1969).
One of the purposes of this chapter is to provide some insights into why cities vary in
size and scope, addressing the question Why arent all cities the same size? As shown in
Figure 3-1, there is substantial variation in city sizes. Panel a shows the size distribution of
the 50 largest urbanized areas. At the upper end, there is one area ( New York) with a
population above 16 million, two areas ( Los Angeles and Chicago) with population between
6 million and 12 million, five areas with population between 3 million and 6 million, and 22
areas with population between 1.5 million and 3 million. In other words, the smaller the
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20
urbanized area, the more numerous the areas of similar size. Panel B of Figure 3-1 shows the
size distribution for the 51st through the 396th urbanized areas.
FIGURE 3-1 Size Distribution of U.S. Urbanized Areas
LOCALIZATION ECONOMIES AND INDUSTRY CLUSTERS

One of the puzzling features of an urban economy is the tendency of firms producing
the same product to locate close to one another. The clustering is puzzling because dispersing
into separate territories would reduce competition for workers and perhaps bring firms closer
to their dispersed customers. There are some subtle benefits from clustering, and for many
industries these benefits dominate the more obvious costs. Well explore three types of
benefits ; sharing the suppliers of intermediate inputs, sharing a pool of labor, and sharing
information. In all three cases, the production cost of an individual firm decrease as the total
output of the industry cluster increase. The label for these external economies is
localization economies, indicating that the cost savings occur only for local firms, (i.e. firms
in the cluster).
Our discussion of localization economies focuses on a firms decision between
locating in an industry cluster or at an isolated site. Well ignore the other facets of the
location decision, leaving the discussion of these other factors for later chapters. Well also
assume initially that the firms export their goods outside the city. Later in the chapter, well
consider the decisions of firms producing products for consumption within the city.
Sharing Input Suppliers
Some industry clusters occur because firms in a particular industry buy an intermediate input
from the same supplier. Firms will cluster around a common input supplier if two conditions
are satisfied:
1. The input demand of an individual firm is not large enough to exploit the scale
economies in the production of the intermediate input.
2. transportation costs are relatively high. If demanders and supplier interact in the
design or fabrication of the intermediate input, face-to-face contact between buyer
and seller is necessary, and proximity to the input supplier is important. Similarly, if
the intermediate input is bulky, fragile, or must be delivered quickly, proximity is
important.
Vernon (1972) uses the Manhattan dressmaking industry to illustrate localization
economies from sharing the supplier of an intermediate input. Because the demand for
high-fashion dresses is unpredictable, a dressmaking firm cannot commit itself to largePage
By Aj.Suthep Nimsai
21
scale production of a given type of dress, but must be prepared to quickly change to
another design if the first dress is unsuccessful. The firm must be small and agile, with its
manager carefully monitoring the dress market, the design process, and the production
processes. For the small and agile firm, specialized labor and machinery----designed to
produce output on a large scale---- are not feasible. The dressmaker buys some of its
intermediate inputs from firms specializing in those inputs.
One of the intermediate inputs to dressmaking is buttons, a good that is subject to
large economies of scale. A large buttonmaker can use specialized labor and large
machines to produce buttons at a relatively low cost. Suppose that it takes 10 small
dressmakers to generate sufficient button demand to exhaust the scale economies in
button production. By sharing a buttonmaker, the 10 dressmakers can get their butters at
a lower cost. It is efficient to share a buttonmaker because there is a scale economy
mismatch: the scale economies in dressmaking are small relative to the scale economies
in buttonmaking.
Should dressmakers cluster around the button firm, or could they share the
buttonmaker by ordering buttons out of a catalog? Dressmakers locate near the button
producer because each dress design requires a unique design, and dressmakers must
supervise the design and fabrication of buttons for a particular dress with face- to face
contact. in contrast with many other intermediate inputs, the buttons for a high-fashion
dress are not standardized, so they cannot be ordered out of a catalog. Physical proximity
to the input supplier is required, causing dressmakers to cluster around the buttonmaker.
There are many other examples of clusters that result from scale economies in the
provision of intermediate inputs.
1. Corporate headquarters produce a wide variety of outputs. An executive may
supervise the development of a new advertising campaign one week, pick a location for a
new plant the next week, and develop a strategy to fend off a lawsuit the following week.
Most corporations hire advertising firms because the scale economies in producing
advertising campaigns are large relative to the advertising demand of an individual
corporation. Corporate executives need to be close to the advertising firm because the
executives assist in the design of the advertising campaign; face time is required. In
general, the clustering of corporate headquarters allows corporations to exploit scale
economies in the production of intermediate goods ( advertising, economic consultants,
legal services ) for which face time is an important part of the production process.
2. Firms producing new high- technology goods face uncertain demand for their
products. Instead of producing all of their own components, they purchase electronic
parts from firms that can exploit scale economies in producing these parts. The firms
interact with their suppliers in the design and fabrication of the components, and must
locate close enough to facilitate frequent face time. Although a high- technology firm
does not need to locate close to its supplier of nuts and bolts ( standardized inputs that can
be ordered from a catalog ), there are substantial benefits from locating close to its
supplier of nonstandardized electronic parts. In addition, high-technology firms exploit
scale economies in product testing by sharing firms that provide testing facilities locating
close enough to tap the testing facilities at top speed.
3. Newspapers and magazines produce outputs ( text and illustrations) that change in
unpredictable way from day to day. in producing their products, publishers call on a
wide variety of exports, including information sources and illustrators . if each publisher
uses an export on Armenian history for one story per year, it would be inefficient for each
publisher to hire a full-time Armenian expert. Instead, the publishers may share a single
expert, sharing the cost of acquiring specialized information . similarly, publishers
occasionally need special illustrations, and call on graphic design firms to do them.
Publishers cluster around organizations that provide expert information ( libraries,
research institutes, universities) and illustrations ( graphic design firms) .
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Part I: Rural and Urban Economics

Part I: Rural and Urban Economics

Why Do Cities Exist?

Part I: Rural and Urban Economics

Comparative Advantage Generates Trade

Adapted form Arthur O Sullivan

Part I: Rural and Urban Economics

Part I: Rural and Urban Economics

Average labor time

Part I: Rural and Urban Economics

Part I: Rural and Urban Economics

Figure 2-2 Market Area of Shirt Factory

Part I: Rural and Urban Economics

Part I: Rural and Urban Economics

Wages Increase with City Size

Part I: Rural and Urban Economics

Number of worker (thousands)

Part I: Rural and Urban Economics

Part I: Rural and Urban Economics

Part I: Rural and Urban Economics

Part I: Rural and Urban Economics

Part I: Rural and Urban Economics

Part I: Rural and Urban Economics

Part I: Rural and Urban Economics

1. Employment opportunities are concentrated in cities because some activities are

EXERCISES AND DISCUSSION QUESTIONS

Part I: Rural and Urban Economics

Part I: Rural and Urban Economics

Part I: Rural and Urban Economics

Part I: Rural and Urban Economics

LOCALIZATION ECONOMIES AND INDUSTRY CLUSTERS

Part I: Rural and Urban Economics

Part I: Rural and Urban Economics

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Rural & Urban Econ-Ch 1

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