Chapter 7The City as an Economic Node

• Introduction

• Urban Economic Functions

• The Urban Economic Base

• Urban Economic Structure

• The Metropolitan Hierarchy

• The New Service Economy

• Summary

Introduction

• City-forming activities:– Manufacturing– Tertiary activities - retail/wholesale

– Producer services– Health services– Consumer services– Transportation

• Benefits of spatial proximity– Information access

Urban Economic Functions

Update of Table 7.1; 2002 includes agriculture, forestry & fishingIn goods production

0

10

20

30

40

50

60

70

80

90

1940 1950 1960 1970 1980 1992 2002

Manufacturing

GoodsProducing

ServiceProducing

Economies of Scale

Generic problem in mfg: How large of a market to serve? It depends in part on the

existence of opportunities to exploit economies of scale. $

Quantity

No scale economiesAC

Scale economiesScale Diseconomies

Returns to scale: Labor

Labor Units Total Output MarginalOutput

AverageProductivity

1 500 500 5002 1500 1000 7503 2750 1250 9174 3850 1100 9635 4750 900 9506 5500 750 9177 6100 600 8718 6600 500 825

Returns to Scale, 1 Factor Input

0

1000

2000

3000

4000

5000

6000

7000

0 5 10

Total Output

MarginalOutput

AverageProductivity

IncreasingReturns

DiminishingReturns

Negative Returns

LaborUnits

TotalOutput

Total LaborCost

AverageLabor Cost

1 500 $20,000 $40.002 1500 40,000 26.673 2750 60,000 21.824 3850 80,000 20.785 4750 100,000 21.056 5500 120,000 21.827 6100 140,000 22.958 6600 160,000 24.24

Average Labor Cost

0

10

20

30

40

50

0 2 4 6 8 10

Assume Labor costis $20,000 per yearper worker

Fixed Costs: Assume $100,000

Quantity of Output

Average C

ost of Cap

ital

$100K

Average Total CostsLaborUnits

TotalOutput

Total LaborCost

AverageTotal Cost

1 500 $120,000 240.002 1500 140,000 93.333 2750 160,000 58.184 3850 180,000 46.755 4750 200,000 42.116 5500 220,000 40.007 6100 240,000 39.348 6600 260,000 39.399 7000 280,000 40.00

Total

Forces Underpinning Scale Economies

•4 Broad Forces

1. Specialization of manpower & equipment:

The division of labor - internal to a firm (detail)

- among firms (social)

(a) increased dexterity of workers in a given task

(b) savings of time as workers move from one task to another

(c) scaling capital equipment to individual tasks with the proper capacity. “Lumpiness” of capital

Forces underpinning scale economies

2. Economies of the large machine1’ x 1’ x 1’ = 1 cubic foot volume

6 square feet surface2’ x 2’ x 2’ = 8 cubic feet volume 24 cubic feet surfaceChange in volume - 8x, change in surface 4x

A tube: if r = 1, Volume = r2, Surface = dor volume = 3.14, surface 6.28

if r = 2, Volume = 12.56, surface = 12.56Change in volume: 4x, change in surface 2x

The “2/3 rule”

Forces underpinning scale economies

3. Economies of massed reserves

In large scale facilities, multiples of given types of equipment lessen the chance of an entire production system being down due to equipment failure.

4. Economies of large scale purchasing

•forward & backward ripple effects from volume

•lowered shipping costs

“Capital Intensive” Manufacturing Tends to Exploit Economies of Scale

“Process” industries - petroleum, chemicals

Batch processes - metals, paper, stone-clay-glass, rubber & plastics

Line Assembly industries - transport equipment, instruments, machinery

Advent of “flexible mfg. Systems” -

reprogrammable equipment

reworking of labor structures

New types of production (Ch. 10)

Interplay of Scale and Technology

• Industrial restructuring - change in MOS -–change in the detail division of labor–change in the social division of labor–processes of vertical integration and

vertical disintegration

• Vertical disintegration - Boeing outsourcing; auto assembly industry

• Vertical integration - Chip makers & computer manufactures (Micron; HP)

Agglomeration: Localized External Economies of Scale

• “Internal” versus “external” economies

- internal due to 4 broad forces described previously within the establishment

- external due to savings caused by spatial proximity of producers

- two broad categories:

(1) localization: within an industry

(2) urbanization: across industries

Examples of Agglomeration(overheads)

Manhatten garment district

London footwear district

Japanese motor vehicle production

Telephone networks in London

Chemicals complex in Asthabula OH

Ann Markusen’s classification of

Industrial Districts (Marshallian, Hub-and-Spoke, Satellite Platform)

Ann Markusen’sAlternativeIndustrial DistrictStructuralRelationships

Asthabula Ohio Industrial Complex

Electro Met CoDiv. Of U.C.C.

Linde Air Prod.Div. Of U.C.C.

Archer-DanielsMidland

Detrex ChemicalIndustries

U.S. Indust. ChemDiv. Nat.Distillers

Electro Met. Co.Titanium Plant

General Time& Rubber

StaufferChem. Co.

U.S. Industrial Chem.Titanium-Zirconium

Ferro alloys

Salt

ChlorinatedSolvents

Oxygen Fatty Alcohols

FatsOils

TiCl4

TitaniumMetal

Titanium& ZirconiumMetals

Titanium &Zirconium Ores

PolyvinylResins

Ores & Lime

? Optimal Size for Agglomerations (Cities)?

Population1K 10K 100K 1,000K

Education economies

Transportation economies

Power Economies

An

nu

al N

et E

con

omie

s

Labor economies

Total Economies

Communication Economies• Information flow within and between major

metropolitan areas

• Possibilities of information overload

Ability to Use Information(Towards Optimal Solution)

Qua

ntity

and

Qua

lity

of I

nfor

mat

ion

(Tow

ard

perf

ect K

now

ledg

e)

Pred’sBehavioralMatrix