What is urban economics?

Urban Economics puts economics and geography together, exploring

the geographical or location choices of utility maximizing households
and profit maximizing firms. Urban economics also identifies
inefficiencies in location choices and examines alternative public
policies to promote efficient choices.
O Sullivan (2009)

Urban (and Regional) Economics adds geographical space to economic

analysis. It recognizes that goods are produced and traded at certain
locations. They are bought by individuals, who live at one and work at
another location. Distance between economic activities implies costs
for moving people and goods. It also affects communication and
interaction among economic agents.
A main focus is land. Land is immobile and associated with a unique
location

Urban Economics studies land use and land prices as a function of its
location. It is also linked to Urban Planning, Urban Sociology, and
UrbanPolitics. It provides a solid understanding of the economics of
cities (and regions) and how market forces shape them.

Is broadly the economic study of urban areas as such, it involves using the
tools of economics to analize urban issue such as crime, education, public
transit, housing, and local government finance. More narrowly, it is a brance
of microeconomics that studies urban spatial structure and the location of
households and firms......learn about monocentric city
What is a city
Place with a relatively high population density
Census definitions
o Urban area: minimum population = 2,500
o Urban population: people living in urban areas
o Metropolitan area: at least 50k people
o Micropolitan area: 10k to 50k people
o Principal city: largest municipality in metro area

Why do cities exist

Conditions for cities
o Agricultural surplus
o Urban production to exchange for food
o Transportation system for exchange
Facts on cities: Figure 1-1, 1-2, 1-3; Tables 1-1, 1-2

Axiom of urban economics

Prices adjust to achieve locational equilibrium
Locational equilibrium: No incentive to move
 Examples of prices behind locational equilibrium
o Rent on beach house > Rent on highway house
o Wage in Coolsville < Wage in Dullsville
o Land rent in center > Land rent on fringe

Self-reinforcing effects generate extreme outcomes

Self-reinforcing effect: leads to changes in same direction
Auto row attracts comparison shoppers
Cluster of artists attracts other artists

Externalities cause inefficiency

Externality: cost or benefit of a transaction experienced by someone
else
External cost: burning gasoline affects breathers
External benefit: painting a peeling house increases property values

Production is subject to economies scale

Economies of scale: Average cost decreases as quantity increases

o Indivisible inputs: Required to produce one or a thousand units

o Factor specialization: Benefits from continuity and repetition

Extent of scale economies varies across activities

Competition generates zero economic profit

Entry into market continues until economic profit is zero
Economic cost includes explicit cost and opportunity cost of time
and funds
Firms earn just enough to stay in business, but not enough to
attract entrants
perlu diingat, dalam ekonomi perkotaan, ada lima aksioma penting.

Pertama, harga akan menyesuaikan untuk mencapai keseimbangan lokasi atau

locational equilibrium. Semakin jauh dari pusat kota semakin murah harga suatu
barang dan jasa.
Kedua, sebuah kota bersifat selfly enforcing. Hal ini dapat menjelaskan dengan
fenomena back to the city. Pada mulanya orang-orang yang bekerja di kota
memilih untuk bermukim di pinggiran kota. Hal ini dikarenakan akses menuju
kota yang mudah dengan tersedianya akses jalan tol. Namun, lama-kelamaan
masalah kemacetan muncul karena semakin banyak orang yang bermukim di
pinggiran kota dan bekerja di kota (jalan tol hanya solusi sementara atasi
kemacetan). Hal ini kemudian mendorong orang-orang untuk kembali bermukim
di kota atau back to the city.
Ketiga, eksternalitas menimbulkan inefisiensi. Eksternalitas dihasilkan saat
tindakan seorang pelaku ekonomi berdampak pada pelaku ekonomi lainnya
tanpa adanya kompensasi.
Keempat, produksi bergantung pada skala ekonomi. Hal ini penting karena
adanya indivisible input (input yang tidak bisa dibagi lagi) sehingga akan lebih
menguntungkan jika memproduksi dalam jumlah besar agar indivisible input
tersebut tidak terbuang percuma. Jasa truk pengangkut merupakan salah satu
indivisible input, akan lebih menguntungkan jika mengangkut dalam jumlah besar
daripada sedikit karena biaya yang ditanggung akan sama saja.
Kelima, kompetisi akan menghasilkan zero economic profit, yaitu kondisi saat
profit sama dengan opportunity cost. Aksioma ini seringkali terdengar di kuliah
mikroekonomi. Kelima aksioma ini tentu amat berguna dalam menilik geliat
ekonomi sebuah kota.

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CH. 5 Urban Growth
This chapter explores the determinants of increases in urban income and employment.
Here are the main points of the chapter:

1. An increase in per-capita income results from capital deepening, increases in

human capital, technological progress, and agglomeration economies.
Capital deepening. Physical capital includes all the objects made by humans
to produce goods and services, such as machines, equipment, and buildings.
Capital deepening is defi ned as an increase in the amount of capital per
workerit increases productivity and income because each worker works
with more capital.
Increases in human capital. A persons human capital includes the knowledge
and skills acquired through education and experience. An increase in human
capital increases productivity and income.
Technological progress. Any idea that increases productivityfrom a workers
commonsense idea about how to better organize production, to a scientists invention
of a faster microprocessoris a form of technological progress. The
resulting increase in productivity increases income per worker.
Agglomeration economies. Physical proximity increases productivity through
input sharing, labor pooling, labor matching, and knowledge spillovers.

Cities increase productivity and income because they bring the inputs to the production
process together and facilitate face-to-face communication. According to
Lucas (2001), cities are the engines of economic growth.
Cities income is different with cities frowth rate

City-Specific Innovation and Income

1. Utility per Worker = Income - Commuting Costs.
2. As city size increases, initially income increases faster than commuting costs
increase, so utility per worker rises.
3. Agglomeration economies are greater than the diseconomies associated with
commuting (noise, air pollution and congestion).
4. As city size continues to increase at some point utility decreases since the
agglomeration economies are less than the diseconomies of commuting.
5. Suppose initial equilibrium is at point i, with 6 million workers in each city and
utility per worker is $70.
6. Suppose one of the two cities experiences technological advances that increase
worker productivity and income. This city's utility curve shifts upward so that utility
per worker is $80 (point j) in the innovation city.
7. Workers in the other city migrate to the innovative city.
8. Migration continues until utility and income is equal in both cities ($75 per
worker) at point s and b.
9. Workers in the innovative city increases to 7 million, while the number of workers
falls in the other city to 5 million.
10. Thus the benefits of innovation in one city are spread to the other cities in the
region.
Region-Wide Innovation and Income
1. Both cities simultaneously get the same innovation.
2. Utility curves of both cities shift upward and utility per worker increases to $80
(point j) in both cities.
3. No migration occurs and both cities retain 6 million workers.

2. An increase in export employment increases local employment through the

multiplier process.
3. The urban labor-supply curve is positively sloped because a larger city has
higher housing prices, requiring fi rms to pay higher wages to compensate
workers for higher living costs.
4. A large fraction of new jobs in a city are fi lled by newcomers, leaving few jobs
for original residents.
5. An increase in total employment in a city increases real income per capita by
( a ) hastening the move up the job hierarchy and ( b ) increasing the labor-force
participation rate.

If the economy is subject to agglomeration economies, the quantity of

labor demanded drops further
For a conventional demand curve, an increase in the wage has two
effects:
1. The substitution effect. An increase in the citys wage causes fi
rms to substitute other inputs (capital, land, materials) for the
relatively expensive labor.
2. The output effect. An increase in the citys wage increases
production costs, increasing the prices charged by the citys fi rms.
Consumers respond by purchasing less output, so fi rms produce
less and hire fewer workers. For the urban labor market, the
presence of agglomeration economies adds a third effect of an
increase in the wage.
3. Agglomeration effect. An increase in the wage and the resulting
decrease in the quantity of labor demanded reduces agglomeration
economies and decreases labor productivity, causing an additional
decrease in the quantity of labor demanded.

Shifting the Urban Labor Demand Curve

Demand for exports. An increase in the demand for the citys
exports increases export production and shifts the demand curve to
the right: At every wage, more workers will be demanded.
Labor productivity. An increase in labor productivity decreases
productioncosts, allowing fi rms to cut prices, increase output, and hire
more workers. As we saw earlier in the chapter, labor productivity
increases with capital deepening, technological progress, increases in
human capital, and agglomerationeconomies.
Business taxes. An increase in business taxes (without a
corresponding change in public services) increases production costs,
 which in turn increases prices and decreases the quantity produced
and sold, ultimately decreasing the demand for labor.
Industrial public services. An increase in the quality of industrial
public services (without a corresponding increase in taxes) decreases
production costs and thus increases output and labor demand.
Land-use policies. Industrial fi rms require production sites that ( a )
are accessible to the intracity and intercity transportation networks
and ( b ) have a full set of public services (water, sewerage,
electricity). By coordinating its land-use and infrastructure policies to
ensure an adequate supply of industrial land, a city can accommodate
existing firms that want to expand their operations and new firms that
want to locate in the city.

Export versus Local Employment and the Multiplier

We can devide production in the urban economy into two types:
Export: sold to people outside the city for example steel, cement etc.
Local: sold within the people of the city where the goods are produced.
And total employment is the total of labor input to produce export and local
goods.
The increase in export employment leads to increases in local employment.
The increase in total employment exceeds the initial increase in export
employment.

The demand for labor comes from fi rms in the city, while supply comes from
households living in the city

CHAPTER 7 Land-Use Patterns

Modern metropolitan area jobs devided into:

1. Central bussisiness district
2. Suburban subcenters
3. Everywhere else
Since most jobs are spread in the centre of the city, we describe the spatial distributions of
employment and population within cities

Since we know that the land price in the centre of the city is expensive because of the existence
of competition in owning land, most of workers are lives away the city centre...
Well explore the market forces behind the transformation of cities and discuss the causes and
consequences of urban sprawl.

THE SPATIAL DISTRIBUTION OF EMPLOYMENT

1. Jobs Inside and Outside the Central Area
2. A Closer Look at the Spatial Distribution of Jobs
3. Employment Subcenters
Mixed-industrial subcenters started out as low-density manufacturing areas
near a transport node (airport, port, or marina) and grew as they attracted other
activities.
Mixed-service subcenters, like traditional downtowns, provide a wide range
of services, and many functioned as independent centers before they were absorbed
into the metropolitan economy.
Specialized-manufacturing subcenters include old manufacturing areas as
well as newer areas near airports that produce aerospace equipment.
Service-oriented subcenters employ workers in service activities such as
medical care, entertainment, and education.
Specialized entertainment subcenters employ workers in television and fi lm.
4. The Spatial Distribution of Offi ce Employment and Offi ce Space
5. The Role of Subcenters in the Metropolitan Economy

THE SPATIAL DISTRIBUTION OF POPULATION

1. Commuting patterns

THE RISE OF THE MONOCENTRIC CITY

Peta industri bandung