Overview

What is economic geography? What are its roots, and to what is it related?

Some key topics

Why locating businesses properly helps guarantee profitability Why land use patterns arise in cities Why regional economies grow or decline How large, global corporations are reshaping the geography of production How industrial systems are being reshaped by the information revolution Why geography matters in economics!!

Geographic Perspectives Economic Geography of the World Economy Globalization Four Major Questions of the World Economy World Development Problems Political Economies Geographical Information Systems

Four Major Questions of the World Economy

What should be produced, at what scale of output, and with what mix of inputs? How should factors be combined? Labor, capital, resource factors, etc. Where should production occur? Who should get output? How should it be divided?

Economics Key Topics

Allocation of Scarce Resources Markets for Production, Distribution, and Consumption The Division of Labor Solving What, How, What Price, What Quantity, and Where Production Takes Place Types of Economic Systems Neoclassical versus Behavioral and Structural Approaches

The Circular Flow

MARKETS FOR GOODS AND SERVICES Firms sell Goods Households buy and services sold Revenue Spending Goods and services bought

FIRMS Produce and sell goods and services Hire and use factors of production

HOUSEHOLDS Buy and consume goods and services Own and sell factors of production

Factors of production Wages, rent, and profit

Labour, land, MARKETS and capital FOR FACTORS OF PRODUCTION Households sell Firms buy Income = Flow of inputs and outputs = Flow of dollars

Copyright 2004 South-Western

The Circular-Flow Diagram

Firms
Produce and sell goods and services Hire and use factors of production

Households
Buy and consume goods and services Own and sell factors of production

 Markets for Goods and Services Markets for Goods and Services
Firms sell Firms sell Households buy Households buy Households sell Households sell Firms buy Firms buy Inputs used to produce goods and services Inputs used to produce goods and services Land, labour, and capital Land, labour, and capital

Markets for Factors of Production Markets for Factors of Production

Factors of Production Factors of Production

Supply-Demand Equilibrium
Price Equilibrium QD = Q s S The supply curve has a positive slope because marginal cost rises as quantity increases

P* The demand curve has a negative slope because the marginal value falls as quantity increases Quantity per period

Q*

Consumer Choice
Consumer choice theory is based on the notion that consumers do the best they can, given the limitations dictated by their incomes and consumer prices.

Utility Maximization
The consumers decision-making process has two steps:
1. Figure out the menu options, or alternative combination of two goods (books and movies). 2. Pick the combination of goods that generates the highest level of satisfaction or utility.

PRODUCTION
Supply and demand are the two words that economists use most often. Supply and demand are the forces that make market economies work. Economics in the micro context is about supply, demand, and market equilibrium.

PRODUCTION
According to the Law of Supply: Supply
Firms are willing to produce and sell a greater quantity of a good when the price of the good is high. This results in a supply curve that slopes upward. The Firms Objective
The economic goal of the firm is to maximize profits.

 Simple profit function Profit = f(revenue or sales, costs of production, transportation costs) Revenue location factors Production cost location factors Transportation cost location factors Economies of scale

Markets
In a market economy, people exchange things, trading what they have for what they want. Although it appears that markets arose naturally, a number of social inventions, such as contracts, insurance, patents, and accounting rules, have made them work better.

Virtues of Markets
In a centrally planned economy, a planning authority decides what products to produce, how to produce them, and who gets them. Under a market system, prices provide individuals the information they need to make decisions. Prices provide signals about the relative scarcity of a product.

Virtues of Markets
The decisions made in markets result from the interactions of millions of people, each motivated by their own interests. Adam Smith used the metaphor of the invisible hand to explain that people acting in self-interest may actually promote the interest of society as a whole.

Shortcomings of Markets
Market failure is what happens when markets fail to produce the most efficient outcomes on their own. The role of government is to correct this problem. Market failure can also occur when buyers and sellers have imperfect information about the quality of goods and services they are exchanging.

The Role of Government in a Market Economy

The role of government in a market-based economy consists of:
Dealing with problems associated with

market failure. Enforcing property rights and protecting private property in order to facilitate production and exchange. Establishing and enforcing rules for exchange in markets. Reducing economic uncertainty, and providing for people who are unlucky.

Specialization and the Gains from Trade

Specialization and exchange makes both people better off, illustrating one of the key principles of economics:
PRINCIPLE of Voluntary Exchange A voluntary exchange between two people makes both people better off.

Comparative Advantage versus Absolute Advantage

In the previous example, Abe is more productive than Bea in producing both goods. Economists say that Abe has an absolute advantage in producing both goods. Despite his absolute advantage, Abe gains from specialization and trade because he has a comparative advantage in producing pizza.

The Division of Labor and Exchange

Three reasons for productivity to increase with specialization: 1. Repetition 2. Continuity 3. Innovation Specialization and exchange result from differences in productivity, which in turn come from differences in innate skills and the benefits associated with the division of labor.

Comparative Advantage and International Trade

Many people are skeptical about the idea that international trade can make everyone better off. Most economists, however, favor international trade. In the words of economist Todd Buchholz:
Money may not make the world go round, but money certainly goes around the world. To stop it prevents goods from traveling from where they are produced most inexpensively to where they are desired most deeply.

Comparative advantage and Increasing Returns

Comp. advantage holds that trade across geographical units arises to take advantage of inherent differences Increasing returns say that trade arises to take advantage of scale and variety gains from specialization