URBAN ECONOMICS LECTURE NOTE

ONCHWARI, Enoch N

HBE2406: URBAN ECONOMICS

Department of Economics, Accounting, and Finance

Jomo Kenya University of Agriculture and Technology

MOTTO: UNDERSTAND AND PASS

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TOPIC ONE: INTRODUCTION TO URBAN ECONOMICS

Urban economics
Urban economics is the area of economics concerned with the application of economics principled
and practices to the life of the urban duelers. Urban and regional economics can also be defined as
the principles of economics which relate to activities of different agents and problems confronting
the urban drivellers. Urban economics is “a field of study in which we use the analytic tools of
economics to explain the spatial and economic organization of cities and metropolitan areas (and
regions) and to deal with their special economic problems.” In and of itself, urban implies an
economic dimension.

Urban

Urban generally is an area that is occupied by a substantial proportion of non-rural workers, whom
are not in nuclear settlement with agriculture forestry and fishery been considered distinctively
rural. It is generally considered as an area with the population of more than 20,000 peoples.

Region

A region is a part or a division of a country or a state. Urban and regional economics can therefore
be defined as a branch of economics that is concerned with the study of the activities and problems
that are faced with people occupying any division (urban or rural) of the state or country with much
emphasis on the Urban drivellers.
Rural – Urban Migration

Rural – Urban migration is the act of massive movement of people from rural area (i.e. areas that
are basically agrarian) to the urban areas due to social or political reason. Such movement has
twin effects in the county as whole, which are the overpopulation of the urban centers and
depopulation (under population) of the rural areas. The rural population of the rural dwellers
continues to fall as a result of movement to the urban centers, the economy’s ability to meet her
production requirement will also be hindered or affected.

Urbanization
Urbanization is a process by which armlet and villages metamorphous or transform into cities and
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 acquires metropolitan status.
Importance of urban economics
An understanding of urban economies, or more loosely the “regional sciences,” is essential for
planners. Urban economics and urban analysis helps
i. inform economic development activities
ii. assist in broad-based local government policy development in the areas of land-use planning,
iii. fiscal capacities, and social needs like housing, health, welfare, recreation, and cultural
programs.
iv. Allows for measures of the effectiveness of policy decisions
v. Allows for measures of the community and region-wide impacts of economic change
vi. Understand the social consequences of economic change.
With regard to the governance of a region and the ostensible distribution of private goods and services, a
study of urban economics allows us also to assess both efficiencies and equities:
Efficiencies refer to the obtaining the most productive uses of private and public resources.
Equities are the concerns that we marshal in light of our characterization of the distribution of the region’s
resources relative to the distribution of the region’s incomes. We may also characterize equity as
distributive justice, or fairness.
Conceptual framework or process of Urbanization
Urbanization is generally concerned with involving the different but interrelated processes of which are:
a) Behavioral process
b) Structural process
c) Demographic process.

Behavioral Process: This view urbanization as a way of life. It is associated with the experience which
individual acquired over time and the associated pattern of behavior.
Structural Process: This view urbanization to be related to the activities of the whole population and the
change in the economy structures. This implies that it is a process whereby people change from being an
agricultural community into non – an agricultural community.

Demographic Process: This view urbanization as a process of population concentration in a way by

which the number of people occupying an area increased continuously.
Factors influencing rural-urban migration

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 The factors influencing rural–urban migration are categorized into two and they are:
1.) Push factors, and
2.) Pull factors
1. PUSH FACTORS
These are factors which lead individual to rural – urban migration as it affects them in the rural areas
they are residing. These factors include:
A. Economic factors: These consist of:
i. Unemployment or under – employment: This result to rural urban migration
when the larger proportion of the population of the rural areas could not secure
a job or a suitably paid job in the rural areas and therefore will often take the
decision to move to the urban centers where they believe there is opportunity
for a gainfully employment.
ii. Lack of economic opportunities: This also result to rural – urban migration
since there is no other productive activities that the populace of the rural areas
can engage themselves in apart from farming. Hence, the rural dwellers are
prompted to move to the urban centers to seek employment in other
productive activities.
iii. Low reward of rural labors: The wage level or reward system of the urban
centers are relatively higher as compared to that of rural areas and this
tends to prompt the rural labors to urban migration to earn increased wage or
improved reward system.
iv. Pressure on land: Since the rural areas are majorly used in farming which
may result to total evacuation of the available land space and as a result there
may not be land space for further farming activities.
B. SOCIAL factors: These consist of:

i. Lack of infrastructural facilities: This also account for rural – urban migration because the
infrastructural level often in the rural areas are poor and inadequate in terms of the road
network, electricity, portable water etc. Thus, this pushes the rural dwellers to the urban
centers where the levels of such infrastructure are well developed.
ii. Lack of educational facilities: The opportunity to be well educated is lesser in rural areas
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 and as a result a number of people who desire higher education will have to move to urban
centers.
iii. Influence of extended family: In developing countries specifically, there is communal living
and responsibility to the family demands, but when there is willingness or desire by an
individual to be free from the pressure of the family people, the individual moves to the
urban centers.
iv. Constraint on female employment: In rural areas often, there is a culture that females
should not be allowed in productive activities except if they are to assist in such activities but
are to concentrate on the upkeep of the home. This impedes the possibility of female
securing employment in rural areas and often drive female to urban centers where there is
no barrier to female employment.
2 PULL FACTORS

These are factors that attract the rural dwellers to the urban centers as a result of their presence or
availability in the urban centers and unavailability or poor level in the rural areas. These factors include:

a) Economic factors: These consist of:

i. Wage differentials: The wage system of urban workers is relatively higher when compared
to that of the rural areas. This would attract the rural workers to move to the urban centers to seek
employment opportunities.
ii. Opportunity of job advantage: In the urban centers, there are numbers of job opportunities
available for the urban dwellers which are not available in the rural areas. This would then give
attraction to the rural dwellers and as a result will prefer to move to the urban centers.
iii. The prospect for female employment urban centers: There is a growing level in the
urban development and as a result, female employment was not constraint in the urban centers.
This makes it possible for rural female to move to urban centers to seek employment since they
are constraint in the rural areas.
b) Social factors: These consist of:

i. Attractiveness of the urban life style: The modes of dressing, the living condition,
standard of living among others in the urban centers are often appealing to the rural

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 dwellers.
ii. Absence of social taboos in the urban centers: There were not strict cultural
regulations in the urban centers. People are free to interact without any strict cultural
constraints.
Consequences or Implications of Rural – Urban Migration

1. Fall in Agricultural activities: This will result from the movement of labor (agile youth) from the
rural area to the Urban centers, the consequence of which would affect the production of basic needs
such as food and the likes. This would in turn lead to an increase in the prices of goods and services
ridiculously.
2. Increased Pressures on Urban Facilities: The ratio of population of people in urban centers as a
result of massive movement of people from the rural areas to the available infrastructural facilities has
grown i.e. what is meant for a population of say 200 people may have to be shared between 2000
people.
3. Growth of Urban Unemployment: The massive movement of rural urban centers compared to the
available urban jobs that increases day-by-day is relatively high. This makes the population of those
who could not secure urban jobs to continue to increase.
4. Under Utilization of Rural Facilities: The government at least ensures that certain essential
facilities or infrastructures are provided in the rural areas, although this might be insufficient and
inadequate. The movement of people to the urban centers would hinder efficient and judicious use of
the available rural facilities.
5. Increase in Social Tension in the Urban Centers (Insecurity): Due to unrealized desired and
expectations regarding that inability to succeed in the right way expected by the immigrant in the urban
centers. This often prompt these group of people to commit social crimes in their drive to be successful
e.g. ritual, armed robbery, prostitution etc.
6. Increase in Social Costs: To cater for the high populated urban dwellers the government needs to
spend more than they budgeted to provide to provide social goods and services for urban population.
Social cost in neoclassical economics is the sum of the private costs resulting from a transaction and
the costs imposed on the consumers as a consequence

MEASURES FOR REDUCING RURAL-URBAN MIGRATION

i. Development of rural areas: This would keep those who are in rural areas and prevent

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 rural-urban migration that may require more cost compared to that of which is required in the urban
centers.
ii. Development of Agriculture: This involves, developing the activities of the farmers
productively through immigration, mechanized farming, fertilization, etc.
iii. Wage Re-structuring between the Rural and Urban Workers: This entails the actions of
government in ensuring that the wages in rural areas are adequate bridging the gap between rural
wages and urban wages and urban wages.
iv. Creation of Employment Opportunities: The government should enact policies that will
generate employment including programs for rural dwellers.
iv. Educational Policies should be Job Oriented: The government should make the
educational policy to be job oriented or reform the educational system to ensure that graduates
can be self-dependent.
TOPIC TWO: PROBLEMS AND CHALLENGES OF URBAN AND REGIONAL ECONOMICS

1. Issue of data collection and measurement

• Inconsistent data collection standards. ...
• Context of data collection. ...
• Data collection is not core to business function. ...
• Complexity of the data
• Lack of training in data collection. ...
• Lack of quality assurance processes. ...
• Changes to definitions and policies and maintaining data comparability.

2. Issue of employment and income distribution

Income inequality is how unevenly income is distributed throughout a population. The less equal the
distribution, the higher income inequality is. Income inequality is often accompanied by wealth
inequality, which is the uneven distribution of wealth.

3. Issue of housing and living conditions

Housing problems include overcrowding, cost burden, and substandard conditions. Housing problems
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 typically refer to households that spend too much of annual household income toward housing
(overpayment) or double up in a unit to share the cost (overcrowding).

4. Issue of transportation and communication

Urbanization involves an increased number of trips occurring in urban areas. Cities have traditionally
responded to the growth in mobility by expanding the transportation supply by building new highways
and transit lines. This has mainly meant building more roads to accommodate an ever-growing number
of vehicles

5. Environmental issues e.g. waste disposal, flooding, etc.

Urban environmental problems are mostly inadequate water supply, wastewater, solid waste, energy,
loss of green and natural spaces, urban sprawl, pollution of soil, air, traffic, noise, etc

6. Issue of management and institutional framework

The framework seeks to foster a shared understanding across government and society about how best
to manage urbanization and achieve the goals of economic development, job creation and improved
living conditions.

7. Level of availability and pricing of urban services

Urban services include sanitary sewers, water, fire protection, parks, open space, recreation and streets,
roads, and mass transit.

CHARACTERISTICS OF URBAN ECONOMIC GROWTH

There are three logical and necessary characteristics of urban economic growth historically:

1. Increased industrial productivity, made possible by

- water, steam, and fossil fuel-powered industries
- increased mechanization and industrialization
- specialization of labor
- more recently, the broad development of infrastructure capable of supporting industrial
production, including physical, electro/digital, and intellectual capital.
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2. Transportation system development
- waterways – hence the emergence of coastal and inland ports as early major trade centers
- railways – allowed efficient and consistent exploitation of the nation’s interior resources
- overall increased mobility and a reorientation of economic power in the nation spatially
- allowance for re-defining the extent of exploitable resources, which led, therefore, to new
nodes of urban efficiency.
- modern information systems, broadband, and other digital conveyances

3. Increased agricultural productivity

- Linked to industrial, transportation, behavior, and scientific advances
- Over the decades there has been a persistent decline in the number of farms and farms, a
concomitant increase in average farm sizes, and incremental gains in yields.
- At the same time, overall food costs as fractions of household budgets have declined

All of this gives rise to an intriguing simultaneous system:

Urbanization = f(agricultural productivity, technology transfer, transportation, etc.)
Agricultural Productivity = f(urbanization, technology transfer, transportation, etc.)

TOPIC THREE: WHY DO CITIES EXIST?

Why cities exist?
Different disciplines have different views

 A military historian might say it is easier to defend against attacks if

populations are concentrated into cities
 A sociologist might point out that people like to interact socially and
in order to do that they must be spatially concentrated
 Economist tend to focus on jobs and the location of employment and firms
 Certain economic forces cause employment to be concentrated in
space
 Concentration of jobs lead to concentration of residences as
 workers locate near their worksite which then result into a city.

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Scale economies
Also known as “economies of scale” or “increasing returns to scale”
 With scale economies:

 business enterprises become more efficient at large scales of operation, producing more
output per unit of input than at smaller scales

 Division of labor

 Scale economies favor the formation of large enterprises or factories, and thus, favor spatial
concentrations of employment

Agglomeration economies
An agglomeration economy is a localized economy in which a large number of companies, services, and
industries exist in close proximity to one another and benefit from the cost reductions and gains in
efficiency that result from this proximity

Scale economies can explain how “company towns” form, but for large cities, agglomeration economies
must be present
 At their broadest level, agglomeration economies occur when individuals and firms benefit
from being near to others
 It is costly to locate into large labor markets, and thus, there must be some benefits from it as
well
Why would a firm producing tradable goods (sold to the whole country or world markets) locate into an
expensive area?
Transportation costs also influence where a firm locates, and they can lead to, or reinforce, spatial
concentration of jobs
Spatial distribution of population and overwhelming evidence on productivity advantages of cities seem to
suggest some kind of externalities
Externality/spillover = cost or benefit that affects a third party who did not choose to incur that cost or
benefit
These externalities are often referred to as agglomeration, but there are many different mechanisms at
work
An often used taxonomy for the mechanisms is Sharing, matching, and learning
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 Agglomeration economies in production.

Brueckner divides agglomeration economies into pecuniary agglomeration economies, and technological
agglomeration economies
• Pecuniary agglomeration economies lead to a reduction in the cost of firm’s inputs without
affecting the productivity of inputs
• Technological agglomeration economies raise the productivity of the inputs without lowering
their costs

Sharing
Agglomeration through sharing occurs when large numbers of firms or workers benefit by drawing on a
common pool of resources when organizing their activities
A larger market allows for a more efficient sharing of
•Local infrastructure and facilities,
•A variety of intermediate input suppliers,
•A pool of workers with similar skills

Matching
One way of thinking about the labor market is that it matches different types of workers and firms:
•The better the match, the higher the benefits to both (match value)
As there are search and matching frictions in the labor market, a larger market allows for better matching
between employers and employees
•Better matching can take the form of improved chances of finding a match, a higher quality of
matches, or a combination of both
•Enhanced for married couples
This applies to matches between buyers and suppliers, or business partners as well

Learning
Even with modern communication technologies distance acts as a barrier to learning

Knowledge or human capital spillovers arise when spatially concentrated firms or workers are more easily

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able to learn from one another than if they were spread out over space
•Large cities provide more opportunities for people and firms to learn from each other and from the
environment around them
•For instance by promoting the development and widespread adoption of new technologies and
business practices

Consumer city
The “old view” of cities was that they provide workers with high salaries and employment opportunities, but
these come at the cost of commuting, crime, and pollution
But now it seems that urbanization is driven more and more by consumer benefits
•Cities have become centers of consumption as cities provide consumer benefits through a variety
•Restaurants, theaters, sports teams, marriage market
Glaeseret a. (2001):
“Scale economies mean that specialized retail can only be supported in places large enough to have a
critical mass of consumers”

Why do we have multiple cities?

Urban life has its downsides such as
•Housing costs
•Commuting costs, congestion
•Crime and other social problems
•Health costs through pollution and poor air quality
•Local land use and housing supply restrictions
Cities are an outcome of the trade-off between agglomeration economies and costs of urban life

Classification of Cities

This course emphasizes economic, spatial, and to some extent the social and fiscal characteristics of
cities. It is important, therefore, to understand what we mean by cities and, maybe even more importantly,
how data are organized for analysis. Good analysis requires specificity in the terms that we use – we must

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 not be indiscriminate when we characterize our towns even though that for most of us “city” and “urban”
are subjective classifications.
We do have standard classifications. They come from the U.S. Census and with only minor modifications
have been relatively consistent over time.

Place
We generally call all incorporated communities places. Incorporated means that the community has
incorporated within its respective state’s laws government the establishment of a civil government.
Within this we get rural places, urban places, urbanized places, and metropolitan places.
Rural places have populations less than 2,500. Urban places have populations greater than 2,500
(or a population density of 1,000 per square mile) Urbanized places are places regardless of size
that are part of a larger urbanized area, usually consisting of a core city, a metropolitan place, that
has a population of 50,000 or more.
MSA
Micropolitan statistical area. Usually has one central urban place of 10,000 – 49,999 in population.
Sometimes is composed of two communities (Keokuk and Ft. Madison in Lee County and Sioux
Center and Orange City in Sioux County are both considered micropolitan communities
MA
Metropolitan Areas contain a central city with a population of 50,000 or greater or are a contiguous
set of cities whose population is 50,000 or more.
CMSA
Consolidated Metropolitan Areas are comprised of two or more MAs that are contiguous with one
another (the Quad Cities in Illinois and Iowa or the Omaha – Council Bluffs region of Nebraska and
Iowa are good examples of smaller CMSAs.
Rural
By definition, rural entails those living in rural places (< 2,500) or those not living in places that are
Rural farm (describe the definitions of a working farm) Rural nonfarm (primarily scattered acreages
and small, disconnected subdivisions)

It is often important for economic analysis and analysts to distinguish carefully what we mean by rural
(i.e., whether we are really talking about farm issues or nonfarm issues). For many people, it becomes a
problem of perception. There are rural portions of metropolitan counties. Some persons characterize all

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 nonmetropolitan spaces as rural. For persons living in rural areas common characterizations of rural and
urban may differ significantly from urban characterizations.

Determinants of City Structure and Function

At the outset, it is important to remember that when we classify cities by structure, function, etc.,our
classifications are stereotypical idiosyncratic.
There are two primary forces in urban development:
1. Centralization -- specialization, agglomeration, other spatial efficiencies, and
2. Decentralization -- suburbanization, sprawl, restructuring of the spatial dimensions of economic
activity.
Much of modern urban study, design and dynamics represents the study of the forces of centralization
versus decentralization. The two create a natural friction.
The development of transportation systems, both within cities, and on an inter-regional basis, is an
important component of city structure and potential size.

1. Railroads, streetcars, subways, and elevators coupled with steel frame construction (Elisha
Graves Otis, 1952) and the invention of the elevator allowed for significant concentrations of
economic activity and populations. These allowed for highly dense levels of growth among the
nations northeastern and much older cities -- those that had matured by 1920.
2. The dominant feature of more modern cities (primarily western and southern) is larger land areas,
lower population density, and higher capabilities of handling automobile, truck, and bus traffic.
These developed primarily after 1920, and most likely after WWII.
3. Another consideration of industrial growth is the need of manufacturing. Early manufacturing
usually required close access to ports or rail hubs to both receive raw products and to ship
finished goods. These generally were central city areas requiring highly efficient uses of land, i.e.,
multi-storied plants, a sufficient pool of skilled and semi-skilled labor, and perhaps other benefits
of agglomeration such as access to specialized tool and machine works. As assembly line
techniques emerged, as worker concentrations were able to decrease due to mass transit and
automobiles, firms were able to rotate or migrate out of central cities in order to adopt new
technologies and new techniques of manufacturing. Much of the evolution of many of the
nation’s interior cities evolved around the new nodes of manufacturing, transportation, and
technology relocations to the peripheral areas, thereby necessitating reorganization of supply,

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 labor, and land use patterns.

The future form of cities.

After WWII, several things happened at about the same time.

 Agricultural productivity began to increase strongly, as also did industrial production,
 investment and deployment of the interstate highway system (ostensibly for defense
 purposes),
 rapidly growing demand for skilled manufacturing labor and higher educated labor,
 the baby boom,
 relatively rapid, if not exponential technical advances in consumer and industrial products,
 and
 the monopoly position in many industries enjoyed in the U.S. that allowed for tremendous
 growth in wealth.
All of these factors in some ways influenced the structure and functions of the modern city.
Modern changes may imply both stability and potential instability for cities:
Changes in manufacturing techniques brought on by global competitiveness factors increased
communications capabilities, and higher transportation efficiencies may allow even greater industrial
decentralization or more strategic industrial location in the future.
Alternatively, a sustained period of high energy prices, for example, may force greater industrial and
population concentrations to minimize energy usage and maximize transportation efficiencies.

Technology changes, primarily in telecommunications, have forced us to rethink our need to be physically
present on the job site. In these instances, telecommunications substitute for transportation needs. But as
of yet these types of changes are more anecdotal than real.
In short, we do not know, we can only infer, the structure and dominant functions of the future city. The best
guidance we have are traditional, and well-thought-out characterizations of historical and contemporary
industrial growth (location theory) and of how cities emerge (central place theory).

As we move into the future, we can anticipate several influences on the future forms of urban
development:

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Technology broadly:
- Transportation
- Communications
- Workplace changes
- Replacement for labor
Factors influencing production costs:
- Labor supply
- Energy and energy policy
- Availability of developable land
Environmental constraints:
- Our understanding of environmental health is still in its infancy
- Many modern reforms affecting city structure, composition, and habitability are founded in
mitigating the “unhealthy” aspects of urbanization.
- Contingent on local and regional abilities to absorb externalities.

TOPIC FOUR: THEORIES OF URBAN ECONOMICS

Location Theory
One of the most prevalent elements of urban studies is the study of location theory: theories of why firms
chose specific sites. Location theory is a body of theory that attempts to explain and predict the locational
decisions of firms and the spatial patterns of industry and agriculture which result from aggregates of
individual decisions. The main aim of locational theorists has been to integrate the space dimension into
conventional economic theory. Location theory originated in the work of Von Thunen and Weber, who
developed models of location for firms in an environment of perfect competition. Both assumed that
entrepreneurs attempted to maximize profits in the face of a given price fixed by the market and outside
their control, with perfect knowledge of the cost characteristics of all locations.
There are effectively three approaches to this locational decision-making: (1) cost minimization, (2) revenue
or benefit maximization, and, (3) profit or net benefit maximization.

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Location theory gives us ways to characterize the location of firms and, hence, the relative preference a
firm will express for one site over another and the general reasons for those preferences.
Shaffer gives us three general schools of thought plus an emerging school for characterizing firm
location:
1. Cost – Firms that are the least cost sensitive
2. Demand maximizers
3. Profit maximizers
4. Behavioral School
5. Institutional
6. Product cycle

1. Cost. Least cost sensitive firms seek to minimize their total production costs, especially transportation
costs. There are two types of costs: inputs and outputs

Here we are assuming that ton per mile costs are relatively equal. b+c are input distances and a=output
distance. X, Y, and Z equal weights. The firm then seeks to minimize tton-miles.

TM=bx+cy+az

Under the least costs school, we usually think of 3 underlying forces determining firm locations.
1. transportation costs
2. overall costs of inputs
3. economies and diseconomies of agglomeration
Firms may emphasize one over the other, which further allows us to characterize least-cost firm
Types further.
Least cost orientations
1. Transport costs.
a. Close to materials locations – high bulk-to-value ratio – are generally weight-losing
operations, like lumber mills, and ore refining. Typically, non-perishable, non-fragile, although
fruit and vegetable canning and meat packing tend to locate amid production centers. Can
also characterize the break of the bulk points, like Buffalo, NY, and Mississippi River ports.
b. Market-oriented locations – lower bulk-to-value ratio -- tend to be perishable, more fragile,

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 and possibly weight-gaining. Examples include bottling, brewing, baking, and automobile
manufacturing.
2. Production (input) costs – here, transportation costs are relatively less important.
a Labor-oriented – low labor costs, usually labor-intensive industries, e.g., textiles and
modern meat packing plants.
b. Power/energy oriented – high fuel inputs, will search for cheaper power, e.g., aluminum
and
other specialty metals manufacture.
c. Amenity-oriented – highly specialized and highly paid workers. Require attractive physical,
social, and intellectual environments. E.g., R&D firms – Research Triangle Park, Silicon
Valley.
3. Agglomerations
a. Localization orientation – need for specialized services and labor, e.g., apparel,
broadcasting, financial services, defense, silicon technologies.
b. Urbanization orientation – need face to face communications with suppliers and customers,
e.g., corporate headquarters, advertising, law, investment banking.

It should be clear that all firms, to the extent that they are able, seek to minimize costs in all of these factors
and that there are relatively few pure types. Still, I think that they are useful for characterizing firms and
identifying their locational incentives. Each subsumes a “least cost” objective. The typologies are useful for
analyzing goods producing firms of the production of specialized services.
Shaffer, however, introduces us to demand maximization factors where sellers of goods select sites to
control as large a market area as possible. (Demand sensitive firms)
Central place theory

Definition.
Central Place Theory: an urban model that uses economic processes to explain hierarchical patterns of
urban size and location across space. Central place theory is a collection of loosely related, informal,
descriptive models of city size, city location, and market area based on the trade-off between increasing
returns to scale in production and the cost of transport of goods from firm to home. Land markets are often
absent. The beginnings of the theory are attributed to Christaller (1933) who first made detailed
observations of urban hierarchies and then attempted to model them. Urban Hierarchy Model (Central

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 Palace Theory)

This theory was propounded by August Lusch and Walter Chistaller. They contend that plants in
various industries have a characterized market radius which results from the inter-play of the three
factors of economies of scale of production, transportation costs and the way the demand for land is
spread over space. The larger the economies of scale of production, the lower the transportation cost the
larger the radius of the territory that will be covered by that industry to maximize profit. Consequently, the
price of real estate is built up to a high level in the resulting cites which will tend to create smaller radius
covered by the industry.
Consequently, small cities will contain industrial activities with shorter market, while large cities will
emerge to contain activities of both small and large radius. Obviously the urban hierarchy approach is
quite applicable to import industry than the export industry where countries have different areas of
specialization in the international markets or they are at different stages of economic development e.g. a
developing country that totally specialize in agriculture might reasonably one or two larger cities serving
national industry.
Differentiated Plane Model by Loch (August Loch’s Central Place Theory)

The German economist August Lösch expanded on Christaller’s work in his book The Spatial
Organization of the Economy (1940). Unlike Christaller, whose system of central places began with the
highest-order, Lösch began with a system of lowest-order (self-sufficient) farms, which were regularly
distributed in a triangular-hexagonal pattern. From this smallest scale of economic activity, Lösch

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mathematically derived several central-place systems, including the three systems of Christaller. Lösch’s
systems of central places allowed for specialized places. He also illustrated how some central places
develop into richer areas than others.
The proponent of this model argues that the limited numbers of transportation route linking to
industries within an economy plays a key role in transforming the economy. The model predicts that
urban concentrations occurs where there is scarce transportation route called internal routes. The
hierarchy of urban size would then depend on the pattern of route and industrial means of primary
processing industry with few inputs which would relocate to the source. In addition, there will be
incentives for industry with strong backward and forward linkages to locate in the same city.

Assumptions of Central Place Theory (CPT)

1. Assume a homogeneous, flat plain with the same physical geography conditions (climate, soil,
resources, etc.) across it. In other words, picture somewhere like Kansas or the Texas panhandle,
not a mountainous region like Colorado.
2. As far as the population goes, assume that people everywhere on this plain have the same income
and that, acting rationally, they will shop at the nearest market that carries what they need, and also
shop at the places with lower prices for the same goods.
3. Assume that transportation costs per unit of distance are equal across the entire space.

Central Place Theory Strengths and Weaknesses.

Weaknesses

1. As with many theories, CPT's weaknesses were recognized by its originator but ignored by those
who sought to apply it too widely. The conditions that produced roughly hexagonal regions in
southern Germany were vastly different than those that produced spatial settlement patterns in
other parts of the world.

2. One common complaint is that real landscapes don't resemble Christaller's landscape. But this is
because he used an abstract space; he was the first to recognize, at the beginning of his work, that

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 the model was based on an abstraction of reality and that conditions on the ground would be
different. He even recognized that mail-order businesses would skew his model; imagine what
online shopping is doing to it now!

3. A more serious charge is the tendency to explain human settlement patterns in terms of economics
and secondarily in terms of political factors, with culture a distant third—and culture itself being
primarily determined by economic and political factors. It is easy to imagine a scenario of a cultural
phenomenon such as ethnic tensions or differences in religion that could outweigh economic
factors in determining where people went for the goods and services they needed.
.
Strengths

1. CPT has been enormously influential in retailing and the tertiary economic sector. Modifications of
CPT are commonplace in economic models that tell retailers where to put stores, for example.
Thus, based on a far more nuanced and complex CPT than we can present here, its predictive
value has been one of its major redeeming features.

2. CPT, because it became the standard for explaining spatial patterns of human settlements, inspired
many variations, particularly among those who said "it doesn't fit the region I am concerned about"
and proceeded to figure out a way to describe the particularities of other processes driving other
patterns.

Economic Theory of Rural-Urban Migration (Harrison Todaro Migration Model)

The Todaro Model postulate that migration proceeds or occur in response to urban-rural differences in
expected gains than actual earnings. The model is of the position that immigrants considered the various
market opportunities available to them in the rural and urban sectors and pursue the one that would
maximize the expected gain for migration. In this vein, the theory assumed that both the actual and
potential members of the labor force compare their expected income for a given time horizon in the urban
sector with the prevailing average rural incomes and migrate if the expected urban income is greater than
that average rural income.

Assumptions of Todaro Model

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 1. There are two sectors which are the rural agriculture and urban manufacturing sectors.

2. There is full employment

3. There is free mobility of labor from one sector to another

4. There is diminishing marginal productivity

5. Urban wages are institutional fixed

6. Labor is homogenous

Characteristics of Todaro Model

1. Migration is stimulated primarily by rational economic considerations of relative benefit and costs (i.e.
wage differential).

2. The decision depends on the actual urban-rural wage differentials and the probability of
successfully obtaining employment in the urban sector.
3. The probability of obtaining the urban job is directly related to the urban unemployment rate.

4. High rate of urban unemployment outcome of the structural imbalance in economic opportunities
between urban and rural areas of most under-developed countries.
Policy Implication of Todaro Model

1. Imbalances in Urban-rural employment opportunity are caused by the effect of “first city bias”. Hence,
these imbalances

should be bridge or minimize.

2. Creation of more urban modern sector jobs without simultaneous attempting to explore rural
discoveries and employment opportunities can result in a paradoxical situation where more urban
employment would lead to higher level of urban unemployment. Therefore, policy should be design to
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 reduce the migration of rural workers.

3. Indiscriminate Education Expansion: This would also lead to further migration and increased
unemployment. Hence, the rural inhabitant with more education is likely to migrate than those with
less education. Hence, education should be discriminated.

4. Important of rural and agricultural development: In solving the problem of urban unemployment
development of rural and agricultural activities cannot be overemphasized. Hence, policy to enhance an
integrated rural development should be rigorously formulated and implemented.
Urban Gigantism

Urban gigantism is a situation where there are few exceptionally big urban centers in a country or
state and a large number of other towns crawling under these centers. It can also be seen as a situation
where some few regions or urban centers in an economy are experiencing continuous transformation
and development in the areas of social, economic and infrastructural development which other centers or
regions are not experiencing e.g. Lagos; Ibadan and Port-Harcourt in Nigeria. A typical example of urban
gigantism is referred to a “first city bias”. First city bias occurs where a country’s largest or first city
received a dis proportionately large or share of public investments and incentives in relation to the
country’s second city and other smaller cities. First city bias can also be seen as a situation where the
country’s resources are concentrated in large units to the country’s first or larges city as compared to the
country’s second and other smaller cities. Consequently, the first city is accorded a disproportionately
and inefficient large share of the population resources and economic activities. first city serves as the
capital and the pattern of the cities are similar in many developed and developing countries.
Causes of Urban Gigantism

There are a number of reasons why gigantism exists in developing countries and these reasons include:

1. Hub and Spoke Transportation System: This type of transportation system were initiated by the
colonial administrators

i. to enhance smooth extraction of the natural resources of the host country. This
makes the colonial rivers to locate the capital city near the outlet of this system and
seal coast.
ii. In addition, such type of transportation system in the capital city are usually situated
internally in the country.
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 2. Location of the Political Capital: The largest city combines the effect of the urban hierarchy model
with the differentiated plan model.
3. Import Substitution Industrialization: This occurs when a country begins to produce the goods and
services which were being imported before from abroad locally with a view be self-sufficient. When
the production of this goods and services or concentrated in a particular city, urban gigantism may
arise.
4. Consequences of dictators to remain in Power: When a dictatorship continues to secure the power
as a leader, the resources of the economy might be diverted towards the continuous development
of his community or city without consideration of other cities.
5. The desire of Firms to be closer to the corridors of power for political favor so as to win contract
and secure political appointments among others.

URBAN INFORMATION SECTOR

The term informal has been mostly debated upon. It’s used and definition has been problematic. Informal
is seen by some scholars as the extent to which bureaucratic practices are in used to formulate work,
specify remuneration, determines the number of employees, level of education, hierarchy of authority
and superiority etc.
Informal Sector is largely seen or perceived as the private sector organization with no pattern of
operation (no bureaucracy and not registered). However, informal sector is a way of life to many
especially in the third world countries and this is not necessarily because of its profitability because it
provides but because it provides escape route from the rigidity in the formal sector. It should be noted
that the bulk of new entrance into the urban labor force seems to create their own employment or to work
for small scale privately owned enterprises.
Informal sector consists of people in diverse areas of employment outside the official wage sectors such
as road side mechanic, hawkers, shoe shiners, truck pushers etc. With the unpresented rate of growth in
the urban population in developing countries and the increasing failure of the rural and urban formal
sectors to absorb the labor force employment, more attention is being directed and promoted to the role
of the informal sectors in providing solutions to the growing unemployment problems.
Characteristics of Urban Informal Sector
1. Large numbers of small-scale production of goods and services which individually or family owned

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 2. Emphasis is on the use of labor-intensive and simple technology.

3. The self-employed workers in the sector of little formal education and are majorly unskilled.

4. Inadequate assets to financial capital

5. Low income and worker productivity

6. No job security, decent working conditions, and old age pension scheme.

7. The workers are immigrants from rural areas who are unable to find employment in the formal
sector.

Policies to Enhance or Promote Informal Sector Activities

1. Government should facilitate training programs in the area that would be of most benefit to the
urban economy to shape the informal sector so that it contains productive and services activities
that can provide the required values to the society.
2. The informal sector generates demand for semi-skilled and unskilled labor whose supply is
increasing in both relative and absolute term and is unlikely to be absorbed by the formal sector
with its increasing demand for skilled laborer force.
3. Promotion of informal sector will ensure an increase in the distribution of the benefit of
development to the poor, many of whom are in the informal sectors.
4. Formal sector is likely to adopt appropriate technique in other to enhance a more efficient allocation
of resources.

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