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Effects of Agglomeration Economics on Urban Areas

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Wordcount: 2445 words Published: 6th Oct 2020

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Agglomeration effects critical to understanding urban economies

This essay is analysing the effects of agglomeration economies has in urban areas. It is explaining how the economic and social increased in past years. The factors which influence the economic in urban areas. In order the economic to grow, an urban area has to be positioned in an area that a development exists and where there is an economic growth is running. As long as an economic energy is in an urban area, also the activity of urban force, it is necessary to gain a contribution on the appearance of the role of urban areas to economic growth and development. Economists concern about how an economic growth of their cities to be increased. Mostly populated urban areas, chances of an economic opportunity exist in those areas. Majority of ideas analyse the importance of the growth opportunities in an urban area. Internal economies make the production of firms to produce goods which are more cost effectiveness than single members. Agglomeration economies cause firms cluster in the cities and clustering causes an economic power and development in that city.

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Talking about people’s growth, it is the first time in history that the urban population in the world is equal to the rural one and by 2050 it expects urban population to represent 70% of the total population in the world. People have been locating in the large cities whereas people from small cities is a common phenomenon. For example, in the US around 75% inhabitants moved in the cities and 83% of employment is in metropolitan areas, so this means 24% of the total area (US Census Bureau, 2008).

Agglomeration Economies is the motion in urban economies. Because all economic activities based in one location. Agglomeration economies mean the spatial concentration result from scale economies. It is also the benefit of the spatial concentration due to the scale of entire of an urban area, but not from the scale of a particular firm (Mills & Hamilton, 1994: 20). if firms locate close to another, this will produce a low cost. So, this is an example of externality of production as the cost of production of firms go lower and the production of other firms get higher. The reality of agglomeration economies is important to the economic justification of urban growth. The amount of economies scale that unit costs fall as the production increases, may vary greatly between various production activities (Mills & Hamilton, 1994: 10).scale of economies is critical to the existence of urban area. The non-existence of scale f economies, goods and services will be produced on arbitrarily small scale to satisfy the demand of small groups of consumers (Mills & Hamilton, 1994: 9). Mixing the scale of economies and transportation cause consumers to locate close by production facilities which is benefitable to meet the expectations the demand in the surrounding area. Goods and services are produced more efficiency on a large scale than on arbitrarily small scale.

The economies scale emerges by two reasons. First one is the factor specialisation increases productivity because the skills of labour increases and spend less time to get a task done to another. Second thing, with out separation inputs has a minimum scale of efficiency. If the that input cut in half, the output of two halves will be less than the output of the whole. As output increase, the firm use will increase amounts of indivisible inputs, thereby increasing productivity (O’Sullivan, 1996: 20).If worker’s wages make no difference if they work at their homes or at a factory, then a small urban area develops around a factory. Local labour will save money travel costs and will increase the price of land by the factory. To spend less on the land, the labour resides smaller lots of land and the density of people nearby the factory relative to the rest of the rest of the region. If a city becomes a high density, companies bring about the development of a small factory city. Factory city will develop as labour can specialise and use their wages to buy other necessities, and economies of scale are large enough to underpin prices that workers would have asked had they been working and selling from their homes (O'Sullivan, 1996: 21).

The scale of economies is connected the conception of comparative advantage. It is important for an urban area to figure out the strengthen of their comparative advantage for it to recognize themselves from other urban areas. There are three dimensions that will often determine an area's comparative advantage, its demand, its production, etc. These dimensions are depth “quality of an area's environment and ingenuity of its people”, diversity of its economy, and scale of activities (Hirsch, 1973: 177).Comparative advantages mean, if a productivity of two different areas become unsimilar. The difference of these two productivities cause “inter alia” by differences in workers skills, climate etc. in addition to that, these productivity difference will make sure that other urban regions will produce goods and services which are lower prices than the other regions. The reason is that the prices are not the same between those regions. On top of this, some of these regions can start to trade different product than the other. The location, traders can cause the development of market cities. Employed people of firms will also locate close to the marketplace as they looking to save travel cost and a higher price of land will be the outcome. Urban people will then make a choice for small pieces of land and it increases the density to the nearby area. Cities develop by the high urban density. The difference between the productivity that generates comparative advantage is large enough to offset transportation costs, so trade occurs (O'Sullivan, 1996: 18).

Localisation Economies: the localisation economies occur when the production cost of entire group of firms decreases as the total output of the industry increases at that location (O’Sullivan, 1996: 24). Firms find it advantageous to be close to other firms in the same industry. Alfred Marshall (1890, 1892) introduces the concept of external economies of scale: Technological externalities: knowledge spill overs across firms. Proximity favours the transmission of ideas, Vertical relationships: proximity to specialized suppliers and Labour pooling which is pool of workers specialized in this industry. Localisation economies produce clusters of firms in the same industry. Companies in the cluster utilize the scale of economies in the production of specialised input as they share the suppliers of these inputs. The cluster attracts the suppliers, companies also utilize the scale economies in supplying of specialised public services. Planners should invent a strategy to establish a cluster closely related firms to attract more growth.

Labour pool is locating firms close together, this will contribute the development of a skilled labour pool. If firms not establish labour demands, then labour market advantages reaching a climax or point of highest development from agglomeration are particularly useful. Firm will spread their workforce because of the number of skilled labour available. Shortage of qualified labour of industry may think developing training schools to improve the quality of labour. Conception of localisation invest to the employment creation as an increased demand for concentration of employment. The growth of employment in local industry is divided in to three. The first is that which can be attributed to total employment growth in the country. Next, a certain percentage may be attributed to the fact that national employment growth in a particular industry was more rapid (or slower) than in the country as a whole. The third part is where a comparison is drawn between the employment growth in the local industry and that industry's national growth rate. Here, a direct comparison is made between the industry's growth locally and nationally and is therefore normally called the competitive position of the local industry (McDonald, 1997: 359).

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External Economies occur from knowledge spillovers are involving the level of productivity of economic growth in a nation. Localisation economies can cause a better training or learning about the most efficient production process from other firms in urban area. However, continued reduction in costs is important. The greater concentration of firms in a particular industry in an urban area will cause a greater rate of new product development, improvement in existing products, as well as improvements in the methods of these products (McDonald, 1997: 344). Following McDonald’s argument, Innovation increases if highly trained participate to improve the industry. The information will likely to be passed by highly trained workers who go from firm to other firm or business meetings and conferences with spying or copying competitors’ products and training programmes. In this modern century, the use of internet, innovators and imitators do not necessarily have to locate close. But still close proximity is important. Mills (1992) has called this situation the transmitting of ambiguous information. He defines ambiguous information as "information that requires an interactive and convergent set of exchanges before the final exchange can be consummated" (Mills, 1992: 11). Internal Agglomeration economies is cost reduction per unit that accumulate to a firm which enlarges its plant in an area. The firm will gain the advantage of this expand, so the agglomeration economies are internal. In addition, fixed cost expands by a large output. Other agglomeration economies such as division of labour and use of technology and savings through the large size of purchases.

Urbanisation economies are firm costs decline as total output of urban area increases. Because of reasons similar to localization economies. But differences include: Produced by the scale of the entire urban economy, Produces benefits for all firms in city, not just in single industry. Urbanization economies underpin why cities exist (Lecture 2 slide: 15). Urbanisation economies differ from localisation economies in two ways: Firstly, urbanisation economies result from the scale of the entire urban economy and not just the scale of a particular industry. Secondly, urbanisation economies generate benefits for firms throughout the city and not just firms in a particular industry (O'Sullivan, 1996: 28). Urban infrastructure is classified as roads, sewers, fire protection and health facilities. Therefore, urbanisation economies occur from the scale of economies in public infrastructure. Furthermore, infrastructure is necessary input in diver sing the private production and the consumption. If the standard and quality of infrastructure provision is on a high level, an increase in the size of an urban area allows lower per unit infrastructure costs (Blair, 1995: 101). These savings in costs may be passed on to producers or consumers in the form of lower taxes. Urban diseconomies occur when the economic concentration increase and becomes more relevant. Urbanisation economies may, to a certain extent, be partially offset by urban diseconomies (Blair, 1995: 102). Scientists point out that crime, anxiety and loneliness are personal costs involve in high density areas. The competition of firms in which they locate close to large agglomerations cause rent increase as well as higher wages specially working in congested areas. Productivity becomes more in the result of the size of urban area increase. Therefore, urbanisation economies tend to outweigh urban diseconomies over the range of the city size (Blair, 1995: 102).

Clustering of similar shops causes sales for all to be higher. Two types of products lead to this: Imperfect substitutes and complementary goods. Also, Sales of one store are affected by location of others in same product line. Noyelle and Stanback (1983) have proposed a scheme for the enumeration and measurement of the fundamental economic functions performed in an urban area. They grouped industries (as defined by the Standard Industrial Classification (SIC) code system) into eight basic functional areas.

In conclusion agglomeration is critical to urban economies, different types of agglomeration occur, the agglomeration economies generated in urban areas are conducive to opportunities for economic growth and development. The mere fact that firms are located within close range ensures that they are well positioned to exploit the benefits provided by proximity within urban areas. The sources of localisation and urbanisation economies are contributing to and strengthening the economic possibilities of this spatial concentration. However, the concentration of economic activities and people that are responsible for creating positive externalities are also responsible for the generation of negative externalities that could offset the expected economic outcome. It is therefore important to address these issues to limit the negative effect thereof on the urban economy. The first of these issues to be addressed is the notion of land use within urban areas. A wide variety of land use opportunities exist within an urban area. Land use in an urban area should be optimally utilised because of the limited amount of land available. These different land uses will be discussed in the next chapter.

Reference List:

  1. University of Pretoria, Chapter: Agglomeration Economies, available at:
  2. Boston MA. O'Sullivan, A. (2008). Urban Economics (6th ed.) McGraw-Hill College
  3. Marshall, A. (1890). Principles of Economics, (8th edit). London: Macmillan.
  4. Rigby, D. & Essletzbichler, J. (2002). Agglomeration economies and productivity differences. Journal of Economic Geography 2, 407-432.
  5. Rosenthal, S. & Strange W. (2003). Geography, Industrial Organization, and Agglomeration, Review of Economics and Statistics, 85 (2). 377-393.
  6. Rosenthal S., & Strange W. (2006). A Companion to Urban Economics, Edit by Richard Arnott, Daniel and P. McMillen, Blackwell Publishing.
  7. UE lecture slides, lecture 2 slides, available at: learning Central
  8. United Nations 2007 world urbanization prospects: the 2007 revision, New York USa http://www.un.org/esa/population/publications/wup2007/2007_urban_agglomerations_chart.pdf
  9. Wheaton, W. (2002). Urban Wages and Labour Market Agglomeration. Journal of Urban Economics 51(3): 542-562.


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