Part II

Urban Economics
 Urban Economics
 Urban economics is concerned with the allocation of
(scarce) resources over space and the location of
economic activities.
• Economic activities :are activities which are
designed to satisfy the needs of human being.
• Economic activities are classified into primary,
secondary, tertiary sectors and quaternary
Sector
 Urban Economics….
 Other branches of economics ignore the
spatial aspects of decision making, adopting
unrealistic assumption that all production and
consumption take place at a single point.
 Urban Economics studies the location choice of
households and firms
 It involves using tools of Economics to analyze
urban issues
 Issues in Urban Economics
 The spatial arrangements of households, firms,
and capital in metropolitan areas
 The externalities which arise from the proximity
of households and land uses
 The public policy issues which arise from the
interplay of these economic forces.
 Urban Economics is the economic perspective of
urban studies
 Issues in Urban Economics….
 Urban Economics deals with problems
surrounding urban growth and development.
 Some of the problems of urban areas:
crowding, public transports, housing, violence
and crime, air, water and sound pollution, etc
 In short, urban economics is about everyday
life taking place over space.
 Urban Competitiveness
Competitiveness is relative and not absolute
 The ability to respond and act for survival and
success within a competitive environment
It’s both efficiency of reaching goals and
effectiveness of having the right goals.
Competitiveness of enterprises, nations or other
geographic areas.
The ability of an urban region to produce and
market goods and/ or services that represent good
value in relation to products of other urban regions.
 Urban Competitiveness…
 The aggregate of the competitiveness of firms
in a city region – essentially synonymous with
productivity.
 The ability of cities to continually upgrade
their business environment, skills base,
infrastructures provision and economic base
so as to:
 Urban Competitiveness…
•Attract and retain high-growth, innovative
and profitable firms, and skilled -
entrepreneurial workforce, capital, technology,
innovation, etc.
• Achieve a high rate of productivity, high
employment rate, high wages, high GDP per
capita, and low levels of income inequality,
and social inclusion.
Categories of Urban Competitiveness (Webster 2008)
 Economic Structure
• economic composition, productivity, investment (foreign
and domestic) and output.
 Territorial Endowments
• Non tradable - location, infrastructure, natural resources,
amenity, cost of living and doing business, and an urban
region’s image.
 Human Resources (highly competent social capital)
 Institutional Milieu
• Business culture, governance and policy frameworks
(including incentive structure), and network behavior.
 Why Do Cities Compete
 To attract highly-skilled workers
• To enhance innovation, production efficiency,
specialization, diversity, competitive advantage, etc.
 To attract competitive investment
 To become local, national/ regional, and global centers
of production, capital, etc
 To be powerhouses for modern economies
• Centers of development
 To attract global (mobile) capital
 To generate improved living standards for citizens
 Forces behind urban competition include:

 Capitalism and associated modern economics

 Global forces
• Free trade
• Liberalization of markets
 Changes in technology

 Geopolitics – power politics

 Stages of Competitive Development

 The basic factor – driven

Competitive advantage emanate from cheap
production factors, hence low production costs
 Stages of Competitive Development…

 The investment - driven

• Attraction of Foreign Direct Investment, and
foreign equity leading to efficiency & productivity
improvements
 The innovative - driven
• Economy driven by ideas than by the industry
 Competitiveness Factors of a City
 Economic Performance
• Macro economic performance of the domestic
economy (Trade, International investment,
Employment and prices)
 Governance Efficiency
• Policies related to investment and business promotion
(public finance, fiscal policy, institutional framework,
business legislation and societal framework).
 Competitiveness Factors of a City…
 Business Efficiency
• Entrepreneurial performance, innovativeness,
productivity, labor market, finance, business
ethics, corporate image
 Infrastructure – i.e. basic business support
infrastructure/ services
• Technological, transport, communication, finance,
education, health, environmental, recreational and
other amenities.
 Comparative Advantage
 The law of comparative advantage refers to the ability
of a party (an individual, a firm, a city, or a country) to
produce a particular good or service at a lower 
opportunity cost than another party/ town.

 E.g coffee for Ethiopia and cars for Japan

 Internal Scale Economies
• Economies of scale (ES) are the cost advantages that
enterprises obtain due to:
• Size, or scale of operation
• Its most important outcome is that the cost per unit of output
generally decreases with increasing scale of production
• The reason is that fixed costs are spread out over more units
of output.
• Often operational efficiency is also greater with increasing
scale, leading to lower variable cost as well.
• This necessitated the emergence of factory production over
cottage (HH) production
 Internal Scale Economies (ES)
 Economies of scale lower the costs of production
 From an urban perspective, larger cities enjoy greater
Scale Economies than smaller ones
 Due to greater concentration of support infrastructure
and services
 This lowers production costs as the costs of services
and infrastructure is shared and thus become lower
 Encourages the location of cities at crossroads, ports,
river junctions, and other transshipment points.
 Market Area of Factory
 Scale economies attract factory production
 Factories replace home production, thereby attracting workers
from homes.
 Workers live near the factories to economize on transport
costs
 Population density becomes high and bid up the price of land
near the factory.
 The consequent clustering of factories results in the
development of a small factory or industrial city
 A critical condition for this to occur:
• Scale economies must be large relative to travel costs, so
the factories can under - price homemade produce
Agglomerative Economies in Production
Agglomerative economies explain why most cities have
more than one factory
•It explains the development and existence of large
industrial cities
• There are two main types of agglomeration effects:
•Pecuniary. Things are cheaper in cities.
•it probably is true for shared resources like electricity,
water and transportation.
•But this is obviously untrue for rent, and many goods
and
 Agglomerative Economies in Production…

Technological: People are more efficient in cites,

possibly because they can learn more from the
diversity of people around them or they are able to
find more suitable jobs.
There are two types of agglomerative economies
• Localization economies
• Urbanization economies
 Localization economies
 Occurs if the production cost of firms in a particular
industry decrease as the total output of the industry
increases.
 For the localization economies to be realized, firms
cluster within a given area
 There are three factors behind the occurrence of
localization economies:
• Intermediate inputs
• Labor market pooling and
• Knowledge spillover
 Urbanization Economies
 Implies the progressive drop in the production cost
of an individual firm due to an increase in the total
output of the urban area.
 It occurs as a result of the growth of the entire
urban economy
• Growth in production, technology, skills,
infrastructure, service delivery and the market.
 Urbanization generates benefits for all firms
throughout the city, not just firms in a particular
industry.
 The location of economic activities
 Location depends on the nature of the activity itself
and on certain location factors such as the:
 Site attributes, accessibility and the socioeconomic
environment.
 Economic activities have their own set of location
factors, some general factors can be identified by
major economic sectors:
 Primary economic activities: dominant location factor
is related to environmental endowments, such as
natural resources
 The location of economic activities..
Secondary economic activities. Imply a complex web
of location factors which, depending upon the
industrial sector, relate to labor (cost and/or skill
level), energy costs, capital, land, markets and/or
proximity of suppliers.
Tertiary economic activities. Involve activities that
are most bound to market proximity, since the
capacity to distribute a product or service is their
most important location requirement.
 The location of economic activities..
 Quaternary economic activities
• Imply activities not linked to environmental
endowments or access.
• Alfred Weber came up with Industrial Location
Theory
 Alfred Weber’s Location Theory
• Postulates that an industry is located where the
transportation costs of raw materials and final product
is a minimum.
• He singled out two special cases.
• Weight-losing case
• weight of the final product is less than the weight of the
raw material going into making the product and;
• Weight gaining case
• the final product is heavier than the raw materials that
require transport
 Cost–benefit analysis (CBA)
 Sometimes called benefit–cost analysis (BCA), is a
systematic process for calculating and comparing
benefits and costs of a project, decision or
government policy (hereafter, "project").
 CBA has two purposes:
 To determine if it is a sound investment/decision
(justification/feasibility),
 Cost–benefit analysis (CBA)…
• To provide a basis for comparing projects.
• It involves comparing the total expected cost of
each option against the total expected benefits,
• to see whether the benefits outweigh the costs, and
by how much.
End of the course