1. The document discusses how cities form and grow due to various economies of scale. Localization economies occur when firms cluster together in an industry and benefit from shared suppliers, labor pools, and information. Urbanization economies make cities larger as total urban output increases. 2. Differences in the strength of localization economies across industries can lead to differences in city size. Larger cities also benefit from providing local goods and services. 3. While telecommunications may replace some in-person meetings, face-to-face interaction will still be needed, so cities will continue to exist due to the physical proximity they provide.

1. BIG and SMALL CITIESBIG and SMALL CITIES
Chapter 3

2. CitiesCities
Trading Cities because some
activities are subject to economies of
scale in transportation.
 Factory Cities develop as a result of
scale economies in production
The scale economies are internal to the
firm.

3. External Economies of ScaleExternal Economies of Scale
The benefits come from the decision
made by other firms.
Increase labor productivity.
The Firms allow tp pay higher wages
Commuting cost are relatively high

4. Localization Economies andLocalization Economies and
Industry ClustersIndustry Clusters
Sharing input supplier
Sharing a pool of labor
Sharing information

5. Sharing Input SupplierSharing Input Supplier
The input demand of an individual
firm is not large enough to exploit
the scale economies in the
production of intermediate input
Transport costs are relatively high

6. Sharing a Labor PoolSharing a Labor Pool
 How many workers will we hire ?
 What sort of labor skills will we need in our
workers?
 A Cluster Firms facilitates the transfer of worker
for two reasons :
 1. Workers have relatively low job search cost
because : - Information about job openings is
spread through informal channels – Prospective
employers are nearby, making formal job
searches relatively easy.
 2. Because of the proximity of employers, moving
costs are relatively low.

7. Benefits and Costs LaborBenefits and Costs Labor
PoolingPooling
 An isolated firm pays different wages in
good times and bad time, but hires the
same number of workers in both cases.
 A Firm in an industry cluster pays the
same wage in both cases, but hires more
workers in good times. The benefits of
clustering and labor pooling is that during
good times the firm pays a lower wage
and hire more workers

8. Differences in City SizeDifferences in City Size
The Roles of localization economies
Urbanization economies
Locally consumed products

9. Localization EconomiesLocalization Economies
 Industries vary in the strength of their
localization of economies.
 Some Industries experience substantial
cost saving from input sharing, labor
pooling, and information spillovers.
 The others experiences relatively small
cost saving.
 The variation in the strength of
localization economies acroos industries
is one factor in generating cities of
different sizes.

10. Urbanization EconomiesUrbanization Economies
 Industries subject to strong localization
economies from large clusters, causing large
concentrations of jobs, Industries subject toe
weaker localization economies form small
clusters and employment concentration.
Urbanization economies amplify differences in
employment because large cities provide greater
urbanization economies. Local employment
amplifies differences in city size because in city
size became larger cities have a wider variety of
consumer goods.

11. The Role of Consumer GoodsThe Role of Consumer Goods
Workers in a city spend some of their
income on consumer products
provided within the city.
Workers buy food, get haircuts, rent
housing, use medical services and
go to sporting events.

12. Agglomerative Economies inAgglomerative Economies in
Marketing : Shopping ExternalitiesMarketing : Shopping Externalities
Imperfect Substitutes
Complementary Goods
Retail Clusters

13. Innovation in TelecommucationInnovation in Telecommucation
and the Future of Citiesand the Future of Cities..
In a given relationship, some face-to-
face encounters will replace by
telecommunication enconters will be
replaced byb telecommunication.
Easier communication may increase the
number of relationship.

14.  1. Localization economies occur because
firms in an industry cluster benefit from
sharing :a. The suppliers of intermediate
inputs b. A labor pool and C. Information
 2. Urbanization economies occur if the
production cost of a particular firm
decreases as the total output of the urban
area increases
 3. The incubation process results from
localization and urbanization economies.
SummarySummary

15. 4. Differences in city size caused in part differences in
localization economies across industries. Any underlying
differences city size are amplified by urbanization economies
and the provision of local goods and services.
5. Innovation in telecommunication technology will not cause
cities to disappear because some activities require face time, so
there will always be a need for cities and the physical proximity
they provide.
6. A shopping externality occurs if the sales of a particular store
increase as other retailers move close r to the store. These
agglomerative economies in marketing cause the clustering of
retailers. Comparison shopping causes the clustering of firms
selling imperfect substitutes. One-stop shopping causes the
clustering of firms selling complementary goods