1. TWO (2) HOMOGENEOUS NON-PRODUCED FACTORS OF PRODUCTION - LAND, AND LABOR.

2. ALL INPUTS AND OUTPUTS ARE PERFECTLY DIVISIBLE.

3. WELL-BEHAVED PRODUCTION AND UTILITY FUNCTIONS.

4. CONSTANT RETURNS TO SCALE (CRTS) IN EACH INDUSTRY.

5. INPUT AND OUTPUT MARKETS ARE PERFECTLY COMPETITIVE.

ALSO:

6. WORKERS ARE PERFECTLY MOBILE.

7. LAND IS PERFECTLY IMMOBILE, BUT QUALITY IS THE SAME EVERYWHERE.

ALL OF THESE ARE GOOD STANDARD MICRO ASSUMPTIONS, AND GIVE GOOD STANDARD MICRO ANSWERS.

ALL OF THIS IMPLIES THAT:

-- LAND RENTS ARE THE SAME EVERYWHERE

-- LAND USAGE IS THE SAME EVERYWHERE.

CONSTANT RETURNS TO SCALE (CRTS) ALLOWS EACH PRODUCTIVE ACTIVITY TO BE CARRIED OUT AT ARBITRARILY LOW LEVELS WITHOUT INEFFICIENCY (EVERYONE IS HIS/HER OWN FACTORY). EVERYONE PRODUCES EVERYTHING.

INFINITE DIVISIBILITY IMPLIES THAT ALL INPUTS AND OUTPUTS NECESSARY TO MEET THE DEMANDS OF CONSUMERS CAN BE LOCATED NEAR WHERE THE CONSUMERS LIVE. INCREASED CONCENTRATION ANYWHERE LEADS TO LOWER WAGES (LOWER VMPLABOR). WORKERS COULD MOVE, AND HAVE MORE MONEY TO SPEND. IN EQ'M, NO $$$ NEED BE SPENT ON TRANSPORTATION (EVERYONE PRODUCES EVERYTHING FOR HIM/HERSELF).

CRTS AND UNIFORM DISTRIBUTION OF LAND (FACTORS) ARE CRUCIAL. WITH CRTS, THE DESIRE TO AVOID TRANSPORTATION COSTS LEADS TO A UNIFORM DENSITY OF POPULATION AND ECONOMIC ACTIVITY (SINCE ALL CAN BE PRODUCED AT A SMALL SCALE).

WE MUST ACCOUNT FOR THE AGGLOMERATION THAT WE KNOW CHARACTERIZES URBAN ACTIVITIES. WHY DO WE SEE CAPITAL/LAND RATIOS THAT ARE HUNDREDS OF TIMES AS LARGE IN ONE PLACE THAN IN ANOTHER?

IN THE TRADE LITERATURE, HECKSCHER-OHLIN CONDITIONS IMPLY THAT VARYING FACTOR PROPORTIONS DRIVE TRADE IN OTHERWISE IDENTICALLY TECHNOLOGICALLY EQUIPPED AREAS. EVEN WITH THE SAME PRODUCTION FUNCTIONS, FACTOR DIFFERENCES ® TRADE. IN 2 X 2 MODEL, LAND INTENSIVE COUNTRY TRADES LAND-INTENSIVE GOOD WITH COUNTRY THAT IS MORE LABOR INTENSIVE, FOR THE LABOR-INTENSIVE GOOD.

WHY? LAND NEAR SHIPMENT POINTS IS DESIRABLE. IF TRADE IS DESIRABLE, SO IS MINIMIZATION OF TRANSPORT COSTS. THIS MAKES LAND NEAR THE SHIPMENT POINTS DESIRABLE. EQ'M OCCURS WHEN LAND VALUES ON THE LESS DESIRABLE LAND EQUALIZE THE TRANSPORTATION COST DIFFERENTIALS.

THE SAME THING MAY OCCUR WITHIN AN AREA (COUNTRY) AS WELL, FOR INTRA-REGIONAL TRADE.

ASSUME SCALE ECONOMIES REQUIRE CONTIGUOUS PRODUCTION IN EQ'M, LARGE AMOUNTS ARE PRODUCED IN SOME PLACES; NONE ELSEWHERE. PRODUCERS OF INPUTS WILL WANT TO BE NEAR THE FIRM TO MINIMIZE TRANSPORTATION COSTS. SO WILL THE WORKER, SO WILL ALL OF THE OTHER ECONOMIC UNITS.

THIS LEADS TO AGGLOMERATION CENTERED ON PRODUCTION OF THE COMMODITY WITH SCALE ECONOMIES. THUS THE LAND VALUES, DENSITIES, OUTPUT-LAND RATIOS ALL DECREASE WITH DISTANCE FROM THE CENTER OF THE URBAN AREA.

THE TWO THEORIES LEAD TO 2 DIFFERENT TYPES OF CITIES

1. CITIES GENERATED BY REGIONAL COMPARATIVE ADVANTAGE TRADE WITH EACH OTHER BECAUSE REGIONS ARE DIFFERENT.

2. CITIES GENERATED BY SCALE ECONOMIES TRADE WITH HINTERLAND, NOT WITH EACH OTHER.

LOESCH EXTENDS SCALE ARGUMENTS TO INDUSTRIES WITH DIFFERENT SCALES. THAT IS, LARGE CITIES EXPORT GOODS TO SMALLER CITIES; SMALLER CITIES DO NOT EXPORT UP.

LARGE CITY ACTIVITIES -> THOSE REQUIRING LARGE SCALES, INCLUDING CULTURAL, SPORTS, SOME PUBLIC SERVICES.

SMALL CITY ACTIVITIES - > LEGAL, MEDICAL, BANKING.

SO, CITIES FUNCTION TO FACILITATE PRODUCTION AND EXCHANGE BY THE NEARBY LOCATION OF ACTIVITIES !!!

THIS HAS SOME PARTICULAR INTEREST IN OTHER FIELDS AS WELL. IN THE HEALTH ECONOMICS FIELD, THERE IS A LOT OF CONCERN ABOUT THE "SHORTAGE" OF PHYSICIANS IN SMALL TOWNS, WHILE THERE MAY BE A "SURPLUS" IN THE BIG CITIES. SUPPOSE THAT WE THINK OF VARIOUS LEVELS OF PRACTICE:

MEDICAL CENTER; HOSPITAL; CLINIC; PRIVATE OFFICE.

SOME CITIES MAY ONLY BE ABLE TO SUPPORT THE SMALLEST, E.G. PRIVATE OFFICE. LARGER CITIES MAY BE ABLE TO SUPPORT PRIVATE OFFICE AND CLINIC ETC. IF THERE ARE SCALE ECONOMIES THEN THE "MISALLOCATION" OF PHYSICIANS MAY NOT BE A MISALLOCATION AT ALL.

ONE FURTHER CONDITION IS NECESSARY FOR THE WHOLE SYSTEM OF CITIES TO WORK. THERE MUST BE A SURPLUS IN THE AGRICULTURAL SECTOR. OTHERWISE, THOSE IN THE CITIES WOULD HAVE NOTHING TO EAT. THE STORY GOES SOMETHING LIKE THIS.

A. FARMER TAKES GRAIN TO NEAREST TOWN. TRADES IT FOR THE GOODS THAT HE NEEDS, SOME OF WHICH IS PRODUCED THERE, MOST OF WHICH IS TRADED FOR FROM ABOVE.

B. MERCHANT TRADES THE GRAIN SURPLUS THAT HE/SHE HAS AFTER TAKING CARE OF NEEDS, "UP THE CHAIN" FOR MORE SOPHISTICATED STUFF.

C. PEOPLE UP THE CHAIN ARE WILLING TO BUY GRAIN, TO STAY ALIVE. WITHOUT GRAIN SURPLUS, NO ONE CAN AFFORD TO MOVE OFF OF THE FARM.

TWO REASONS, THEN FOR CITIES,

1. SCALE ECONOMIES

2. INTERREGIONAL TRADE

MAJOR ADVANTAGES TO PROXIMITY

1. LOW TRANSPORTATION AND EXCHANGE COSTS

2. TAKE ADVANTAGE OF SCALE ECONOMIES

MAJOR DISADVANTAGES

1. ULTIMATELY DIMINISHING RETURNS TO RATIOS OF NON-LAND TO LAND INPUTS.

2. EXTERNALITIES !!! NOISE SMOKE, DISEASE, ETC.