Where Do Cities Develop?
How
Many Cities?
Profit Maximizing Firm
• Market oriented firm
• For each location, chooses cost minimizing
combination of K & L to produce Q
• Calculates profit in each location for life of
facility
• Choose location that
Factors Affecting Location Choice of
Businesses
• Transportation Costs
– Transfer oriented firm
• Resource oriented firm
• Market oriented firm
• Production Costs
– Energy,labor, local public goods, taxes
– Localization and Urbanization economies
• Inertia
Transfer Oriented Firm
• Model
– Single output
– Single transferable input
– Fixed factor proportion
– Fixed prices
• Production Costs are equal across locations
• Firm chooses location to minimize transportation costs:
witix+w0t0(xm-x)]Q where wi is the weight of the input, ti is
the transport rate for input, x is distance from input source,
xm is location of market, w0 is the weight of the output, t0
is the transport rate for output.
Findings
• In single output/single input model, firm will tend to locate
at one of the endpoints. This tendency is reinforced if there
are terminal costs of line haul economies.
• In single input/output model, if monetary weight of input
exceeds monetary weight of output, firm will locate at the
source of input (resource oriented firm).
• In single input/output model, if monetary weight of output
exceeds monetary weight of input, firm will locate at the
market (market oriented firm).
• With multiple markets and ubiquitous inputs, firm locates
at median location.
Principle of Median Location
• Single product but dispersed consumers
• Consumers uniformly distributed along line
• Ubiquitous inputs
• Cost of delivery included in price of product
• Choose location that minimizes delivery
costs - midpoint
• More generally, median location is where
1/2 sales on one side and 1/2 on other
Production Costs
• Local input costs
• Labor costs
• Taxes, regulations and public services
• Localization and urbanization economies
• Government Incentives --tax abatement;
industrial bonds; loan guarantees; site
development
Market Structure and Location
Decisions
• Monopoly, median location principle,
market area
• Monopolistic competition
– Trade-0ff between production costs and travel
costs because of economies of scale in
production
– Also, firm’s location decision affected by
presence of rival firms. Textbook doesn’t
discuss this.
Algebraic Model of Market Area
• Number of CD’s purchased each month per person
=d
• Population density - e
• Land area of region -A
• Output of typical store - q
• Per capita demand is independent of price
• Q =d*e*A (Total demand in region)
• N=Q/q (Total number of stores)
• M=A/N (Market Area of store)
q
M=
d×e
Determinants of Market Area
• Demand Density -- A larger density implies a smaller
market area. Demand density is a product of per capita
demand and population density. Income also affects
demand density.
• Economies of Scale --With fixed demand, significant
economies of scale imply a larger market area. When law
of demand holds, this tendency is offset by increase in
demand density.
• Transportation Costs - With fixed demand, a decrease in
transportation costs tends to increase market area. When
law of demand holds, this tendency is offset by increase in
demand density.
Simple Central Place Model
• Initial Uniform population density
• No shopping externalities
• Ubiquitous inputs
• Uniform demand
• Three goods. The three goods have
different per capita demands and scale
economies
Implications of Central Place
Theory
• Hierarchical system of cities
• Differences in scale economies give rise to
diversity in the size of cities
• Regions will have a small number of large
cities and a larger number of smaller cities
• Consumers travel to bigger cities to shop;
not vice versa.
Changes in Assumptions
• No disruption of urban hierarchy
– Scale economies
– Shopping externalities:may reduce number of
cities
– Variation in demand
• Possible disruption of urban hierarchy
– Resource oriented firms
Questions for Discussion
• What would explain the emergence of
mega-cities (a single large city , no smaller
cities)?
• How would central place theory explain the
emergence of edge cities (growth in number
and size of small cities surrounding a large
city)?