Lecture 1:

Why do cities exist?

What is a city?
 Why do cities exist?
• Thought experiment 0: Agricultural
– Land (homogeneous)
– Labour (people)
– Capital
– Random endowment and perfect mobility

What would this “society” look like?

 Why do cities exist?
• Thought experiment 1: Agricultural
– Land (differential fertility)
– Labour (people)
– Capital
– Random endowment and perfect mobility

Aside: What is the assumption that drives

the conclusion in this thought experiment?
• First nature of geography
• Thought experiment 2: Manufacture
soap
– Land everywhere identical (homogeneous)
– Labour
– Capital
• Production technology: 100 dollars to set up;
capacity of producing a maximum of 1000
soaps

Why would you not move to other

locations? (internal) economies of scale
• Economy of scale
• Thought experiment 3: Manufacture
soap
– Land everywhere identical (homogeneous)
– Labour
– Capital
• Production technology: 100 dollars to set up;
capacity of producing a maximum of 1000
soaps
• Requires inputs to be shipped from other
locations; costs 10 dollars per km
– This is the external economies of scale or
agglomeration economies
• External economy of scale and
agglomeration economies

Examples?
• Second nature of geography
 Paul Krugman
• Agglomeration due to natural resources
– This is the first nature of geography

• Agglomeration due to other non-natural

reasons such as being closed to
transportation route, inputs, outputs,
demand, customers
– This is the second nature of geography
 Why do cities exist?
• Thought experiments
– Land
– Labour
– Capital

• Production technology requires

input/output linkages that drive
agglomeration to lower production
costs.
 What are the sources of
agglomeration economies?
• Alfred Marshall:
– Labor pooling
– Knowledge spillover
– Input sharing

• Industry-specific:
– Localization economies
– EOS is due to the fact they are the same
industry
• Jane Jacobs: (diversity coming from
different industries)
– Urbanization economies
 Why do cities exist?
• Thought experiments
– Land
– Labour
– Capital

• Skilled workers / educated

individuals: cities offer job
opportunities and higher wages
Summary
How do we test if it is urbanization or
localization economy that is driving
urban growth?
 What is a hypothesis?
3 elements

e.g., In Silicon Valley, it is localization

economy rather than urbanization
economy that is driving Silicon Valley’s
economic growth.
Set up a hypothesis
Gather data / create variables
Set up a model
Estimate the model
Interpret the results
How do we ensure the robustness of the
model?
 Lecture 2:

How are land uses organized

over space within a city?