Urban economics and real estate lectures
Lecture 1 – Why do cities exist
,If there were NO scale economies:
• Suppose there were only:
§ Constant returns to scale in production
§ Constant returns to scale in transport
§ While you observe transport and commuting flows
• Then:
§ No benefits from clustering of production factories
§ No benefits from clustering goods for transport
§ Dis-benefits from clustering in space, since this drives up land prices
§ Everybody would be self-sufficient
§ There would be no commuting (“spatial impossibility theorem”)
There are scale economies in production!
• Sources of scale economies in production:
§ Factor specialization (back to Adam Smith)
§ Indivisibility of inputs (minimum efficient scale)
• If economies of scale in production do exist:
§ Concentration, in spite of high land rents
§ Factory production may become more efficient than home production
There are scale economies in transport!
• Sources of scale economies in transport:
§ Technological change -> combine shipments
• If economies of scale in transport do exist:
§ Transport cost/ Kg/ Km/ fall if volume increases
§ Combine shipments
§ Trade and transport companies will emerge
From factory to factory town:
• Workers want to economize on commuting
§ Live close to factory
§ Location: close to (energy) inputs, driving up density and land prices -> a
factory town emerges
• This simple idea can perfectly explain why cities grow when:
§ Economies of scale become more important (machines are fixed costs)
§ Transport becomes more efficient (railways)
è Typical of cities that emerged during the industrial revolution
Trading cities:
• Workers want to economize on commuting
§ Live closely to transport firms
§ Location: ‘strategic’ or ‘central’ location -> driving up density and land prices
-> a trading city emerges
• This simple idea can perfectly explain why trading cities grow when:
, § Transport becomes more efficient (railways)
• Very long history (3000 BC)
1. Examples: Cape Town, New York, Amsterdam, etcetera
Sources of agglomeration economies:
• Marshall (1890) already discusses agglomeration economies
, • He defined three main sources:
1. Input- and output sharing (goods)
2. Labour market pooling (people)
3. Knowledge spillovers (ideas)
Input- and output sharing:
• Lower transportation costs of goods
§ Input sharing: a cluster will attract input suppliers
o Lower input prices due to competition
§ Output sharing: more potential customers
Labour market pooling:
• Lower transportation costs of people
§ Varying demand for labour
§ Varying supply for labour
§ Easier to find the ideal worker
o Highly educated people in Amsterdam
o Movie stars in Hollywood
o Etcetera
Knowledge spillovers:
• Lower transportation costs of ideas
§ Formal and informal exchange of information
o Labour mobility between firms
o Network events, pubs, etcetera
o Cooperation with nearby other firms
è Leading to new ideas
§ Example: Silicon Valley
Other benefits of urban size:
• Amenities (enjoyable)
§ Universities, theaters, pubs, shops, museums, etcetera
• Joint labour supply of families
§ The two workers (‘mum & dad’) may look for different industries
§ Relatively more ‘power couples’ in bigger cities
• Greater learning opportunities
§ Wider variety of visible role models
• Social opportunities
§ Greater chance of meeting others who share your interests
• Sorting of people
Lecture 1 – Why do cities exist
,If there were NO scale economies:
• Suppose there were only:
§ Constant returns to scale in production
§ Constant returns to scale in transport
§ While you observe transport and commuting flows
• Then:
§ No benefits from clustering of production factories
§ No benefits from clustering goods for transport
§ Dis-benefits from clustering in space, since this drives up land prices
§ Everybody would be self-sufficient
§ There would be no commuting (“spatial impossibility theorem”)
There are scale economies in production!
• Sources of scale economies in production:
§ Factor specialization (back to Adam Smith)
§ Indivisibility of inputs (minimum efficient scale)
• If economies of scale in production do exist:
§ Concentration, in spite of high land rents
§ Factory production may become more efficient than home production
There are scale economies in transport!
• Sources of scale economies in transport:
§ Technological change -> combine shipments
• If economies of scale in transport do exist:
§ Transport cost/ Kg/ Km/ fall if volume increases
§ Combine shipments
§ Trade and transport companies will emerge
From factory to factory town:
• Workers want to economize on commuting
§ Live close to factory
§ Location: close to (energy) inputs, driving up density and land prices -> a
factory town emerges
• This simple idea can perfectly explain why cities grow when:
§ Economies of scale become more important (machines are fixed costs)
§ Transport becomes more efficient (railways)
è Typical of cities that emerged during the industrial revolution
Trading cities:
• Workers want to economize on commuting
§ Live closely to transport firms
§ Location: ‘strategic’ or ‘central’ location -> driving up density and land prices
-> a trading city emerges
• This simple idea can perfectly explain why trading cities grow when:
, § Transport becomes more efficient (railways)
• Very long history (3000 BC)
1. Examples: Cape Town, New York, Amsterdam, etcetera
Sources of agglomeration economies:
• Marshall (1890) already discusses agglomeration economies
, • He defined three main sources:
1. Input- and output sharing (goods)
2. Labour market pooling (people)
3. Knowledge spillovers (ideas)
Input- and output sharing:
• Lower transportation costs of goods
§ Input sharing: a cluster will attract input suppliers
o Lower input prices due to competition
§ Output sharing: more potential customers
Labour market pooling:
• Lower transportation costs of people
§ Varying demand for labour
§ Varying supply for labour
§ Easier to find the ideal worker
o Highly educated people in Amsterdam
o Movie stars in Hollywood
o Etcetera
Knowledge spillovers:
• Lower transportation costs of ideas
§ Formal and informal exchange of information
o Labour mobility between firms
o Network events, pubs, etcetera
o Cooperation with nearby other firms
è Leading to new ideas
§ Example: Silicon Valley
Other benefits of urban size:
• Amenities (enjoyable)
§ Universities, theaters, pubs, shops, museums, etcetera
• Joint labour supply of families
§ The two workers (‘mum & dad’) may look for different industries
§ Relatively more ‘power couples’ in bigger cities
• Greater learning opportunities
§ Wider variety of visible role models
• Social opportunities
§ Greater chance of meeting others who share your interests
• Sorting of people
