The Economics of

Urban Growth
Dr. Adnan A. Alshiha

Determinants of the
Growth process
The distribution of resources.
Relative mode of production.
Level of demand.
The efficiency of price system.

The Principles of
Location Analysis
People want to locate where they can
maximize their satisfaction.
Producers desire to locate where their
profit are expected to be maximize.
Producers motives are more important
than worker motives. Why? Because:
Businessman has more to lose.
More change in the pattern that
determine firm preferences than the
pattern
that
determine
consumers
preferences.

The Principles of
Location Analysis
We begin with producers decision.
Production process is consist of
three stages:
Procurement.
Processing.
Distribution.
Procurement and Distribution
have a common determinant:
transportation cost

Transfer Cost and Firm Location

The reduction of transfer costs is a strong
incentive to concentrate the three stages of
production at a single point in space.
Transfer cost must be consider in relation to
distance.
For given modes of transportation, transfer
cost per unit of product increase with
distance.
But at longer distance , the increase begin
to tail off.
In other word, as distance increases , the
marginal cost of shipping a good anther
kilometer decline.

Transfer Cost Distance

Relationship
Truck

Transfer cost

Rail
Barge

Distance

How Do Transfer Cost Affect

Individual Producer?
Consider a producer (bakery)
in single
linear market, where neither the volume of
business nor his processing cost varies
with his location.
The bakery hires a boy for deliveries and
the boy can carry only one customers
order at a time.
Where the firm locate to minimize the boy
trips?
The mean or Average distance?
The mode?

Single Materials and

Market site Location
Problem

If the marginal procurement cost

exceeds the marginal distribution
costs, it will pay to locate at the
material site.
When firms market are cities and
the marginal procurement cost
relatively low, we would expect
firms to locate in cities

Single Materials and

Market site Location
Problem
nsf
a
r
lT
a
t
o
T

sts
o
C
er

oc
r
P

Material
Site

nt
e
m
ure

Distance

Dist
ribu
tion

Market
Site

Single Materials and Market site

with Terminal Cost and Transfer
Economies Total Cost

Di
s tr
ibu
ti o
n

t
en
em
r
cu
o
Pr

Distance

Single Materials and Market

site with Terminal Cost and
Transfer Economies

It will pay producer to locate at the

material site or the market site. For at
these points the firm could save terminal
cost on materials or the final product.
In general , producers will be oriented
toward markets when the product:
1- is weight gaining manufacturing, as
beer.
2- has higher transfer costs on distribution
, than on procurement
3- is perishable, as are ice , baked goods,
and fresh agricultural product.

The Location Decision of

Persons
Firms motives are more important in
determining the location of economic
activities than persons motive.
It follows, that people will tend to be
pulled to the center or areas of rising
economic activity.
People will be pushed away from areas
having low levels of income per capita or
wage rate and high unemployment level.
pull and push factors diminish as
distance between the two cities increases
(people have lee information).
These ideas can be expressed in simple
gravity model.

Models of Urban Growth

A short Run
Determination.

Model

Income

Urban Economic Base Models.

Central Place Models.
Input-Output Models.

A short Run Model Income

Determination
The Keynesian multiplier: reciprocal of
the quantity (1 minus the marginal
propensity to consume).
When any given change in spending is
multiplied by the multiplier , one get
the final change in income.
Example:
If people spend of any given change
in their income, the multiplier will have
a value of
1/(1-3/4)

A short Run Model Income

Determination
Aggregate income or production
(Y) =the sum of consumption (C),
Investment
(I),
Government
expenditure (G), and net export
(X).

Urban Economic Base Models

The economy of the city may be
divided into two sectors:
1- The exporting or basic sectors.
2- The service or non-basic sector.
The basic sector is the key to growth

Basic and non-basic

1- The exporting or basic sectors:
bring income into the city by selling
goods and services outside the city
2- The service or non-basic sector
whose output sold within the city

Economic-Base Studies
Base
studies
were
done
by
estimating
the
amount
of
employment that was used to
produce goods and services sold
outside the city.

Methods of estimating
export employment
The location quotient
The minimum-requirement

The location quotient

For any sector is found by comparing
that sectors share of the total
employment in the city with the share
of employment for that sector in
benchmark area.
Example:
If the chemical sector in a given city has
20% of the citys total employment
While
chemical
share
of
total
employment in Saudi Arabia is only 10%
This method allocate of the chemicals
employment in the city to export.

The minimumrequirement
Involve arraying the Percentage
of total
employment of industry for number of cities.
Cities are grouped according to population
size class
The percentages are arrayed from smallest
to largest.

The lowest percentage is considered that

share of employment rquired to service local
needs.
The remaining employment is said to be
basic.

Change
S
S
S
W
a
g
e

D
D

Employment
Basic

Employment
Non - Basic

Central Place Models

Explain the size , number, and
distribution of towns across
space.
The word central comes from
relatively efficient location of
city
with
respect
to
hinterland.

the
the
its

Degree of Centrality
Is measured by its order.
High-order cities offer high-order goods,
have
many
establishment
,
large
population, and a vast hinterland.
High-order good: are shopping goods the
consumer would travel a sizable distance
to purchase (mink coats, diamond,
professional sport).

 Lower-order
places:
provide
lower-order
good
to
small
surrounding areas.
Lower-order goods are primary
necessities, such as groceries and
gasoline, which require frequent
purchase with minimal travel

Origin and Size of Central

Places
Are explained by two concepts:

Threshold: is the minimum level of demand required to

support the production of good by (at least) a single
establishment.
Once production is originated for any good , how far
does the market extend? This is determined by the
range.
The range: delineates the zone around any central
place from which a person travel to obtain the good.
Since the price of any good rises with distance the
range is limited by the relevant transportation cost.
Technically, the boundary of the range is that point in
space where a person is indifferent in choosing
between two central places that offer the same good.

Input-Output Models
Describe the interrelationships among
industries and final users of products for
any economy.
Industries are defined on product basis,
each
industry
produce
a
single
homogeneous product.
Final users (final demand): consumer,
government, investors and export.
The model shows how the output of each
industry is distributed to all of its users.
The model also show the purchases of
inputs from all other industries or sectors.

The Input-Output Table

Sale to

Sector 1 sector2

Final
Total
demand Gross
output

SR.20

SR.40

Purchase from

Sector 1
sector2
Value added
TGO

SR.40

30

80

50

80

100

200

90

SR.10
0
200

300

Direct coefficient
per Riyal of Output
Sector 1 Sector 2
Sector 1 0.2

0.2

Sector 2 0.3

0.4

Value
added

0.4

0.5

Direct and indirect

requirements per Rial of
delivery of Final Demand
Sector 1 Sector 2
Sector 1 1.43

0.48

Sector 2 0.71

1.90

Impact
Multipli
er

2.38

2.14

Distributional Impact
of Urban Growth
How income is distributed?
The importance of This issue to
contemporary urban poverty and
other problem is self-evidence
In general, the distribution of income
is determined by how things are
produced
and
the
taste
of
consumers.

Is urban Growth
Immutable?
The urban size ratchet: the rate
growth never fall bellow zero.
This is a reasonable explanation
why big cities continue to grow

Is There an Optimum
Sized City?
Demand and comparative advantage act as limits on
the size of cities.
The
problems
of
pollution,
congestion,
and
interjurisdictional spillover could be classified as
possible symptoms of excessive urban size.
Optimal city size is reached when the additional
social benefits of adding anther person to the city
are exactly equal to the additional social cost.
That is , when the marginal social utility of adding
anther person is zero