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firmlocation

  1. 1. Land Use, Housing and Government Lecture #6:Firm Location, Market Areas and Market Competition Samuel R. Staley, Ph.D.Fall 2011, Florida State University
  2. 2. Recall the economist’s view of cities…• “Urban economics is designed as the study of cities. A city, in turn is defined as a spatial agglomeration of people. Hence, the spatial location of production and consumption is inherent in all urban economic analysis.” William T. Bogart, The Economics of Cities and Suburbs, p. 39.• The economics of cities is the economics of space and spatial relationships in an economic contextDr. Staley, Fall 2012 ECP3617: Housing, Land Use 2 and Government
  3. 3. Where should a business locate within a region?Dr. Staley, Fall 2012 ECP3617: Housing, Land Use 3 and Government
  4. 4. Why Do Businesses Cluster?• Economies of scale are not spatial  They are internal to the firm (no other firms benefit)• Agglomeration economies: Efficiencies and increases in productivity that result from clustering activity in a certain area (proximity).  Urbanization economies: Efficiencies and increases and productivity that result from density, or being in a city.  Localization economies: Efficiencies and increases and productivity that result from locating near other related firms.• Agglomeration economies are external  Firms cluster• Transportation costs are critical factorsDr. Staley, Fall 2012 ECP3617: Housing, Land Use 4 and Government
  5. 5. Location is Driven by the Firm’s Production Function• Natural resources  Weight “losing” firms locate near resource base• Production, manufacturing & assembly  Transportation costs for assembly & production  Logistics• LaborDr. Staley, Fall 2012 ECP3617: Housing, Land Use 5 and Government
  6. 6. Why Do Firms Locate Where They Do?Dr. Staley, Fall 2012 ECP3617: Housing, Land Use 6 and Government
  7. 7. Dr. Staley, Fall 2012 ECP3617: Housing, Land Use 7 and Government
  8. 8. Firms Compete for Land Key is Rent Gradient Hierarchy of PlaceDr. Staley, Fall 2012 ECP3617: Housing, Land Use 8 and Government
  9. 9. What Happens WhenFirms Decentralize?• Commuting costs still determine location• Now, wage rates reflect differences in commuting to CBD vs. a firm located closer to the edge • Firms are no longer homogenous• Add a wage gradient to the land gradient• Firms now compete for workers between the locations• NOTE: workers bid up land closer to their employment based on compensating differentials in commuting vs. wage rates.Dr. Staley, Fall 2012 ECP3617: Housing, Land Use 9 and Government
  10. 10. The Fully Decentralized City• Decentralized firms have important advantages over centralized firms• They can offer lower wages (and lower their cost of production)• They can better match the labor force to needs• They minimize commuting costsDr. Staley, Fall 2012 ECP3617: Housing, Land Use 10 and Government
  11. 11. Dr. Staley, Fall 2012 ECP3617: Housing, Land Use 11 and Government
  12. 12. Share of Employmentin US Urbanized AreasDr. Staley, Fall 2012 ECP3617: Housing, Land Use 12 and Government
  13. 13. Changes in US Urban AreasDr. Staley, Fall 2012 ECP3617: Housing, Land Use 13 and Government
  14. 14. Change in US Urban DensitiesDr. Staley, Fall 2012 ECP3617: Housing, Land Use 14 and Government
  15. 15. Market Areas and Urban Hierarchy• Conventional economics:  price (P)  quantity (Q)  Qd = A + b(P)• Now, add a distance term  Quantified by looking at transportation costs (dr)  Now Qd = A + b(P + dr)Dr. Staley, Fall 2012 ECP3617: Housing, Land Use 15 and Government
  16. 16. Effects of Transportation Costs on the Demand CurveDr. Staley, Fall 2012 ECP3617: Housing, Land Use 16 and Government
  17. 17. Further Analysis: Price, Cost & DistanceDr. Staley, Fall 2012 ECP3617: Housing, Land Use 17 and Government
  18. 18. Dr. Staley, Fall 2012 ECP3617: Housing, Land Use 18 and Government
  19. 19. • Derive the distance demand curve• Translate conventional price quantity relationships• Derive quantity- distance relationship• If price changes, demand curve shifts Dr. Staley, Fall 2012 ECP3617: Housing, Land Use 19 and Government
  20. 20. Multiple Firms, Multiple Market AreasDr. Staley, Fall 2012 ECP3617: Housing, Land Use 20 and Government
  21. 21. Making Demand 3-D: The Demand ConeDr. Staley, Fall 2012 ECP3617: Housing, Land Use 21 and Government
  22. 22. Examples of market areasProduct/Service Radius (miles)Soft drinks (soda) 68Concrete production 144Ice cream 158Bolts, nuts, screws 167Fertilizers 828Cigarettes 1,108Dr. Staley, Fall 2012 ECP3617: Housing, Land Use 22 and Government
  23. 23. Economic Function Minimum PopulationGeneral merchandise 6,859Restaurant 460Candy store 35,000Health care service 637General grocery store 2,570Dentist 426Drug Store 458Bank 616Hospital 1,159Dr. Staley, Fall 2012 ECP3617: Housing, Land Use 23 and Government
  24. 24. What will increase the size of a market area?• Fixed costs increase  requiring higher prices to be competitive• Costs per trip fall  Allowing customers to travel farther• Frequency of trips fall• Density fallsDr. Staley, Fall 2012 ECP3617: Housing, Land Use 24 and Government
  25. 25. Other factors that could influencethe size of a market area over time:• Inflation• Changes in technology (e.g., big box retailing)• Development of other cities & locations• Propensity for industry clustering• Interdependencies among people and businesses• Location specific attributesDr. Staley, Fall 2012 ECP3617: Housing, Land Use 25 and Government
  26. 26. Optimal output for the Individual Firm• Profit maximizing firm  MR = MC  Economic profits >0• Output < market optimum• Price > market optimumDr. Staley, Fall 2012 ECP3617: Housing, Land Use 26 and Government
  27. 27. The ability to maximize profits will determine the size of the market areaDr. Staley, Fall 2012 ECP3617: Housing, Land Use 27 and Government
  28. 28. Market areas will expand until competition limits further growthDr. Staley, Fall 2012 ECP3617: Housing, Land Use 28 and Government
  29. 29. • Monopolistic competition  Free entry and exit  Homogeneous product • Allows normal profits  Economic profits = 0 • Optimum outputDr. Staley, Fall 2012 ECP3617: Housing, Land Use 29 and Government
  30. 30. In a perfect market, all areas would be servedDr. Staley, Fall 2012 ECP3617: Housing, Land Use 30 and Government
  31. 31. The size of market areas will be determined by competitionDr. Staley, Fall 2012 ECP3617: Housing, Land Use 31 and Government
  32. 32. Determining the Size of Market Areas• Basic Parameters  v: frequency of trips (consumption)  k: trip cost per mile  mc: marginal cost of goods to retailers  C: fixed cost for retail facility  F: Buyer density• Key Variables  P: unit price of a good  D: distance between retail stores  T: market area boundary  S: individual store salesDr. Staley, Fall 2012 ECP3617: Housing, Land Use 32 and Government
  33. 33. Market Area Boundary• P + kT = P0 + k(D-T), or  P + kT = P0 + kD – kT  P + 2kT = P0 + kD  2kT = P0 – P + kD  T = (P0 – P + kD)/2k• Thus, ↑k≈↓T ↑D≈↑T  ↑ P0 or ↑ P ≈ ↑ECP3617: Housing, Land UseDr. Staley, Fall 2012 T 33 and Government
  34. 34. Annual sales per store…• Depends on frequency trips and density of buyers, so S = 2TvF, or• S = vF[(P0 – P + kD)/k]Dr. Staley, Fall 2012 ECP3617: Housing, Land Use 34 and Government
  35. 35. Entry and Store Density• Long-run Equilibrium:  D = [(C/kvF)1/2;  P = mc + (kC/vF)1/2;• Thus, goods purchased more frequently (↑v) increases store density (↓D) and lowers profit margins (↓P) (neighborhood pharmacy).• Higher fixed costs will lower store density (↑D) and increase profit margins (↑P) (mall stores)Dr. Staley, Fall 2012 ECP3617: Housing, Land Use 35 and Government
  36. 36. Real World Retail• On-line retailing  Amazon.com  Ipad  Dell Computer• Life-style centers  Spending patterns  Income  Versus strip shopping centers  Versus conventional shopping mallsDr. Staley, Fall 2012 ECP3617: Housing, Land Use 36 and Government
  37. 37. Market Areas and AgglomerationDr. Staley, Fall 2012 ECP3617: Housing, Land Use 37 and Government
  38. 38. Hierarchy of Place • Some cities serve larger markets than others • Primary services • Secondary & tertiary servicesDr. Staley, Fall 2012 ECP3617: Housing, Land Use 38 and Government
  39. 39. From: John P. Blair, Local Economic Development , p. 76Dr. Staley, Fall 2012 ECP3617: Housing, Land Use 39 and Government
  40. 40. Dr. Staley, Fall 2012 ECP3617: Housing, Land Use 40 and Government
  41. 41. Rank Size Rule• A cities rank in the urban hierarchy may be related consistently to population  Second rank city is 0.5 * population of largest city  Third city is 1/3 size of the largest city• Formula: Rank = C/Nb  C = constant  N = population  B = estimated from data on rank & population where b = 1 if the rank size rule holds• Study of 29 cities  Two-thirds, 0.80 < b < 1.20  Median = 1.09, slightly higher than the rank size rule implies• Studies using economic definitions estimate b = 1.02Dr. Staley, Fall 2012 ECP3617: Housing, Land Use 41 and Government

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