CHAPTER 3 Trading and Factory Towns McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. A Model of Backyard Production Three assumptions underlie the backyard-production model Equal productivity of labor and land Constant returns to scale in exchange Constant returns to scale in production
Together, these assumptions eliminate the possibility of exchange and guarantee that each household will be selfsufficient. The backyard-production model lists assumptions under which cities dont develop. Dropping the assumptions results in a changing model. McGraw-Hill Education. Comparative Advantage and Trade: Production and Opportunity Cost Discuss the implications of dropping the assumption of equal
productivity using the information in the table. McGraw-Hill Education. Comparative Advantage and Trade: Gains from Specialization Discuss the implications of dropping the assumption of
equal productivity using this figure. McGraw-Hill Education. Scale Economies in Exchange, Trading Firms, and Trading Towns (1 of 3) Discuss the implications of dropping the assumption of constant returns to scale in exchange using these points. Under this assumption, an individual household can exchange shoes and milk just as efficiently as a trading firm, without the
need to pay a firm to execute a transaction. For example, each Stitch household can link up with a Squeeze household to exchange shoes and milk directly. McGraw-Hill Education. Scale Economies in Exchange, Trading Firms, and Trading Towns (2 of 3) A trading firm will emerge if economies of scale are associated with exchange. Scale economies could result from two economic phenomena.
Indivisible inputs Labor specialization McGraw-Hill Education. Scale Economies in Exchange, Trading Firms, and Trading Towns (3 of 3) The economies of scale from indivisible inputs and labor specialization decrease transaction cost, meaning that a trading firm will be more efficient than an individual in executing trades. In the context of economies of scale, discuss:
how a trading firm allows further specialization among workers why a trading firm will locate at a place that can efficiently collect and distribute large volumes of output why a city has a high population density McGraw-Hill Education. Trading Cities in Urban History Trading cities develop when comparative advantage is combined with scale economies in transport and exchange.
Most of the workers in trading cities didnt produce goods, but instead collected and distributed goods produced elsewhere. Discuss how comparative advantage played a role in U.S. urban history, using Eli Whitneys cotton gin as an example. McGraw-Hill Education. Scale Economies and a Factory Town (1 of 2) Production is subject to constant returns to scale. The price of factory shoes
The market for shoes is competitive, so the price must be just high enough to cover the average cost of producing shoes Using the above assumption, discuss how production is subject to constant returns to scale in shoe production. McGraw-Hill Education. Scale Economies and a Factory Town: Average Production Cost
McGraw-Hill Education. Scale Economies and a Factory Town (2 of 2) The market area of a factory A single shoe factory in a region competes with homemade shoes and will sell shoes to any household, for which the net price of factory shoes is less than the cost of homemade shoes. Discuss how production is subject to constant returns to scale
with reference to a single shoe factory in a region. McGraw-Hill Education. Scale Economies and a Factory Town: Net Price and Market Area of Factory McGraw-Hill Education. Factory Towns (1 of 2) A factory city develops because scale economies make factory
shoes cheaper than homemade shoes. The Industrial Revolution of the 19th century produced innovations in manufacturing and transportation that shifted production from the home to large factories in industrial cities. A factory town will develop around the shoe factory. Workers will economize on travel costs by living close to the factory, and competition for land will bid up its price. The higher price of land will cause workers to economize on land, leading to a higher population density. McGraw-Hill Education.
Factory Towns (2 of 2) The replacement of handcraft production with standardized production generated large-scale economies, causing the development of factories and factory cities. Innovations in intercity transportation contributed to industrialization and urbanization. Innovations decreased the relative price of factory goods, contributing to the growth of factory cities. McGraw-Hill Education.
Factory Towns: Industrial Revolution and Market Area Discuss the effects of the transportation and production innovations of the Industrial Revolution on the market area of a factory.
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