Chapter 1 - Agglomeration economies

Question 1

Four types of agglomeration economies:

Answer 1

1. Sharing intermediate input producers
2. Tapping a common labour pool
3. Improving skills matching
4. Sharing knowledge

Question 2

Firms will cluster and share intermediate products if two conditions are met:

Answer 2

• Economies of scale : Intermediate products and firms are subject to economies of scale … ; Lower average cost (AC) for intermediate products; More specialised products can be produced

• Face time
If the intermediate products require dedicated time (face time – you have to specifically design the product) or unique, bespoke design, and is not a standardised product, there is benefit to cluster

Question 3

Sharing intermediate input producers

Answer 3

graph and content

Question 4

Tapping a common labour pool

Answer 4

graph and content:
o Firms cluster to allow labourers to be transferred between firms at low cost
1. Search cost:
•Cluster has higher density of information about job opportunities , workers spend less time going to
interviews / opportunities
2. Relocation cost:
•Workers that change jobs need not move – lower cost
u = r.u(w) + (1 – r).u(w – s)

Question 5

Improving skills matching

Answer 5

graph and content
assumptions
1.Variation in worker skills
2.Economies of scale in production
3.Firm skill requirement
4.Training costs

Question 6

Sharing knowledge

Answer 6

content

Question 7

other benefits of city size:

Answer 7

1. Joint labour supply
   • Household with two working adults – choose single residence and two workplaces
   • Households attracted to locations with mix of industries, and workers will be willing to accept
   lower wages in cities with more favourable mix of industries
   • So cities solve joint labour supply issues
   • See example of heavy industries, mining, metal industry and textile industry
   2.Learning (Role models)
   • Some obvious benefits in terms of formal education
   • But also other benefits in terms of work experience (learning from others, and apprentice), and
   social interactions
   • There is a learning and knowledge dividend in urban areas
   3.Social interaction
   • What about social and cultural activities, sport and social
   • Gyms, Restaurants, reading, wine clubs, etc.

Question 8

• Firms cluster because of the benefits – more workers
• But as they cluster, employment increases, which generate agglomeration diseconomies that (may) offset
these benefits
• Increase in the number of workers can be accommodated by:
• Increase in the density (building up) of residential areas
• Increase in the land area (building out)
• In both cases, i.e. building up and building out, the increase in size of workforce leads to an
increase in salary (wages), and eventually production cost
• Remember, salaries is an input in production costs

Answer 8

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Question 9

equilibrium vs efficient cluster size graphs

Answer 9

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