AGEC 603. Location, Location, Location. What is Trade? Introduction to Location Theory. Perfect competition

Transcription

1 AGEC 603 Introduction to Location Theory Location, Location, Location Perfect competition Land resources fixed location Distance from market Costs land products to market Costs capital and labor to the land Rent and value levels Locational differences play a role in determining land use What is Trade? Voluntary exchange of goods and /or services Barter to medium of exchange systems Key monetary systems facilitates trade lower transaction costs Bilateral vs. multilateral Exists because of specialization and division of labor most economic agents concentrate on a small aspect of production, trading for other products Trade is between individuals to countries 1

2 Concepts Affecting Trade Absolute advantage ability of an economic agent (firm, individual, or nation) to produce more of a good or service than competitors, using the same amount of resources Adam Smith Comparative advantage ability of an economic agent (firm, individual, or nation) to produce a good or service at a lower opportunity cost David Ricardo Absolute Advantage Assume Two countries, same amount of labor, but can produce different amounts of goods with this labor, and linear PPC Country Corn Oil Canada 1500 tons 5 million barrels U.S tons 5 million barrels U.S. / Can tons 1 million barrels The U.S. is the most efficient producer of corn. The two countries efficiency with oil is the same. With trade, the U.S. would specialize in corn and exchange part of its surplus for oil. Canada would specialize in oil and trade part of the surplus for corn Comparative Advantage Country Corn Oil Opportunity Cost - oil Canada / 5 = 300 tons / barrel U.S /5 = 1000 tons / barrel U.S. / Can Opportunity Cost - corn 5/1500 =.003 barrels / ton 5/5000 =.001 barrels / ton What is comparative advantage(s), if any of these two countries? 2

3 Oil million barrels Factors Affecting CA Natural endowment Favorable production climate Transportation considerations Institutional arrangements Amenity factors Interrelationship of comparative advantage factors Production Possibility Frontier Based upon assumption that both countries fully employ all resources, technology and specific amounts of labor per year. U.S. Canada Corn Oil Corn Oil Graphically PPF Canada produces 3 million barrels oil and 600 tons corn US Canada U.S. produces 2 million barrels oil and 3000 tons corn Corn tons

4 Oil million barrels Specialization and Trade U.S. specializes in corn and Canada in oil U.S. Canada Corn Oil Corn Oil Before After Net Trade Net Effect better same better same Graphically PPF Canada consumption of oil does not increase but consumption of corn increases Trade effectively pushed the PPF outwards. U.S. Consumption in oil does not change but consumption of corn increases Corn tons Trade Summary With trade, the U.S. specializes in corn, trades 1,000 tons of corn to Canada for 2 million barrels of oil and consumes more corn and the same amount of oil Canada will specialize in oil, producing 5 million barrels and no corn, they would trade 2 million barrels of oil for 1,000 tons of corn, consuming the same amount of oil but increasing consumption of corn Both the U.S. and Canada have gained from trade 4

5 Assume Two countries they have the same amount of labor, but can produce different amounts of goods with this labor Country Corn Oil Country A 5000 tons 5 million barrels Country B 500 tons 50 million barrels B / A Question What is absolute advantage(s), if any, of these two countries? A) B in corn and A in oil B) B in oil and A in corn C) B in both D) A in both E) no absolute advantage Question Assume Two countries they have the same amount of labor, but can produce different amounts of goods with this labor Country Corn Oil Country A 5000 tons 5 million barrels Country B 500 tons 50 million barrels B / A 500 /5000 =.1 tons 50 / 5 = 10 barrel What is absolute advantage(s), if any, of these two countries? A) B in corn and A in oil B) B in oil and A in corn C) B in both D) A in both E) no absolute advantage Assume Two countries they have the same amount of labor, but can produce different amounts of goods with this labor Country Corn Oil OC oil OC corn Country A 5000 tons Country B 500 tons Question 5 million barrels 50 million barrels 5000/5 =1000 5/5000 = /50 = 10 50/500 =.1 B / A 500 /5000 = 50 / 5 = 10 barrel What is comparative.1 tons advantage(s), if any, of these two countries? A) B in corn and A in oil B) B in oil and A in corn C) B in both D) A in both E) no absolute advantage 5

6 Question Assume Two countries they have the same amount of labor, but can produce different amounts of goods with this labor Country Corn Oil OC oil OC corn Country A 5000 tons 5 million barrels 5000/5 =1000 5/5000 =.001 Country B 500 tons 50 million barrels 500/50 = 10 50/500 =.1 What is comparative advantage(s), if any, of these two countries? A) B in corn and A in oil B) B in oil and A in corn C) B in both D) A in both E) no absolute advantage Four Area / Land Use Example Land Rents $ Land Use Lake States Midwest West Great Plains Wheat Corn-hogs Potatoes Dairying Absolute Advantage Land Rents Land Use Lake States Midwest West Great Plains Wheat Corn-hogs Potatoes Dairying Example highest rents absolute advantage! 6

7 Comparative Advantage Land Rents Land Use Lake States Midwest West Great Plains Wheat 25/10 =2.5 30/14 = Corn-hogs /30= Potatoes Dairying Comparative advantage = (rent associated with highest rent) / (rent use i) What you give up for use i. Summary The law of comparative advantage was contrasted with absolute advantage. Trade occurs because traders anticipate gains from trading Comparative advantage determines why nations, regions, and individuals trade The basis for trade is differing opportunity costs among nations, regions, individuals, etc. Nations, regions, individuals specialize in producing those goods in which they are most efficient and exchange these goods with other nations Johann Heinrich von Thünen Agriculturalist and economist Isolated State Importance forms the basis for most of the land use theory today Key written before industrialization Tends to blur the results 7

8 von Thünen Model - Assumptions Centrally located city Homogenous land Level and productive plain Soil quality and climate Transportation directly to the market Farmer s rationale maximize rents Model R = Y (p-c) YFm R rents Y yield p price c costs F freight rate m distance to market von Thünen Model - Results Bulky Crops Cereal Grains Gardens & Milk Cows Forest Products Grazing Wilderness von Thünen Model - Example Illustration of Transportation Costs and Rents Effect on Location Land Use Land Rent at the Market ($) Transportation Costs ($ / mile) Distance to No Rent Margin (miles) Range or Circle (miles) A $10.00 $ B C D

9 Land Rents as a function of enterprise and distance Selected Calculations Land Use Miles A B C D 1.5 $6.25 $5.95 $4.23 $ $6.00 $5.88 $4.21 $ $5.75 $5.81 $4.19 $ $5.50 $5.74 $4.18 $ $0.00 $4.20 $3.78 $ ($2.50) $3.50 $3.60 $ ($5.00) $2.80 $3.42 $ ($15.00) $0.00 $2.70 $ ($35.00) ($5.60) $1.26 $ ($37.50) ($6.30) $1.08 $ ($40.00) ($7.00) $0.90 $ ($42.50) ($7.70) $0.72 $ ($52.50) ($10.50) $0.00 $ ($90.00) ($21.00) ($2.70) $0.00 Concentric Circles and Rent Triangle Rent Cones 9

10 THE ISOLATED STATE No Non-distance Related Advantages Transportation Cost Determines Uses Concentric Zones VON THUNUN S CONCLUSIONS Zones of Highest and Best Use Transference Margins Fix Borders Land Rent Cones von Thünen Model - Weaknesses Transportation costs constant Variations in topography Variations in soil fertility Fixed demand and price One isolated market 10

11 Extension - Transportation Extension - Transportation College Station: Original city boundary at incorporation in

12 Extension Land quality Extension Land quality Extension Land quality 12

13 Extension Land quality von Thünen Model Extension Basic model R = Y (p - c) Yfm Modified model R i = Y i (p i - c i ) Y i F i m i R rent Y yield p price c costs F freight rate m distance to market All parameters are a function of the parcel or i Extension Several Markets 13

14 Extension Several Markets Extension Several Cities Competition for Market Areas Cities compete for Raw materials Sell products Assumptions Three producers Comparable product Prices $45, $35, and $50 fob Uniform transportation costs Variations in soil fertility 14

15 Competition for Market Areas Webber s Model - Industry B C Webber s Model - Industry B A D C 15

16 Webber s Model - Isotim Webber Model - Example Two production inputs water and grain Locate to minimize transportation costs One town to sell Production process beer Four possible locations Grain Fields Mountain Springs Thirsty Town Rail Juncture Example Data Material transportation costs Transport Material $ / mile Hops & grain 0.11 Spring Water 0.03 Bottle Beer 0.11 Location and Transport Distance - Miles Location Grain Water Beer Grain Fields Mountain Springs Rail Juncture Thirsty Town

17 Example Cost Calculations Location Grain Water Beer Total Costs Grain Fields $0.00 $0.30 $1.10 $1.40 Mountain Springs $1.10 $0.00 $1.10 $2.20 Rail Juncture $0.66 $0.15 $0.55 $1.36 Thirsty Town $1.10 $0.30 $0.00 $1.40 Transport all three goods! Grain Increases to $0.15 / mile Location Grain Water Beer Total Costs Grain Fields $0.00 $0.30 $1.10 $1.40 Mountain Springs $1.50 $0.00 $1.10 $2.60 Rail Juncture $0.90 $0.15 $0.55 $1.60 Thirsty Town $1.50 $0.30 $0.00 $1.80 Beer Increases to $0.12 / mile Original costs for grain and water Location Grain Water Beer Total Costs Grain Fields $0.00 $0.30 $1.20 $1.50 Mountain Springs $1.10 $0.00 $1.20 $2.30 Rail Juncture $0.66 $0.15 $0.60 $1.41 Thirsty Town $1.10 $0.30 $0.00 $

18 Foreshadowing Concentric circles / rent bid gradients for urban areas City Center Industrial Residential Foreshadowing Concentric circles / rent bid gradients for urban areas ety.com/wiki/tikiread_article.php?articleid=16 18