economies of agglomeration


  • The concentration of this economic activity in one area (usually a city center) allows for the growth and expansion of activity into other and surrounding areas because of
    the cost-minimizing location decisions of firms within these agglomeration economies to sustain high productivity and advantages which therefore allow them to grow outside of the city (core) and into the periphery.

  • At the foundational level, proximity – especially to other facilities and suppliers – is a driving force behind economic growth and is one explanation for why agglomeration
    effects are so evident in major urban centres.

  • If localization economies were the main factor contributing to why cities exist with the exclusion of urbanization economies, then it would make sense for each firm in the
    same industry to form its city.

  • The second benefit is the development of industries due to the increasing returns to scale in intermediate inputs for a product, and the third source is the relative ease
    of communication and exchange of supplies, laborers, and innovative ideas due to the proximity among firms.

  • [11] Another source of agglomeration diseconomies—higher crowding and increased waiting time—can be observed in disciplines or industries that are characterized by constrained
    access to relevant production facilities or resources.

  • [6] Advantages of agglomeration When firms form clusters of economic activity, particular development strategies flow in and throughout this area of economic activity.

  • [10] Furthermore, agglomerated centres of production, like cities, also facilitate learning – that is, knowledge generation, diffusion, and accumulation – on a larger scale
    than smaller economic regions.

  • This technological impact, specifically in the communications field, will provide and dismiss the barrier between firms in the same industry located further away and nearby,
    leading to a greater concentration of information flow and economic production and activity.

  • These increasing returns to scale “give rise to [urban systems]”, capturing “the trade-off between transportation costs and economies of scale”.

  • [2] Moreover, massive urban areas like cities, which contain a multitude of industries in a localised area, can help firms offset their reaction to shocks more efficiently
    by ‘pooling’ labour resources together.

  • Large cities experience these problems, and this tension between agglomeration economies and agglomeration dis-economies may contribute to the area’s growth, control the growth
    of the area, or cause the area to experience a lack of growth.

  • In that case, there are no networking linkages and therefore makes it difficult for all firms in the area to obtain resources and increase production.

  • The decreased transportation costs associated with the clustering of firms lead to an increase in the likelihood of a core-periphery pattern; the result will be that more
    intermediate inputs will be focused at the core and, therefore, will attract more firms in related industries.

  • A small decrease in the fixed cost of production can increase the range of locations for further establishment of firms leading to loss of concentration in the city and possibly
    the development of a new city outside the original city where agglomeration and increasing returns to scale existed.

  • [2][5] While the concentration of economic activity in cities has a positive effect on their development and growth, cities, in turn, help foster economic activity by accommodating
    population growth, driving wage increases, and facilitating technological change.

  • Increasing returns to scale are internal economies of scale to a firm, and may allow for establishing more of the same firm outside the area or region.

  • Furthermore, technological spillovers may be more beneficial to smaller cities in their growth than larger cities because of the existing informational networks that already
    helped them form and grow.

  • [12] As stated above, these factors are what decrease the pricing power of firms because of the many competitors in the area as well as a shortage of labor and lack of flexibility
    among firms to the laborers abound.

  • [1] • Labour pooling and matching: agglomerating effects, such as an increase in population and therefore human capital, arguably help improve matching within the economy,

  • [25] However, over-competition would hinder companies’ development and innovation, and also generate some social problems.

  • It provides increasing returns to scale for each of the firms located within that area because of the proximity to available sources needed for production.

  • Benefits arise from the spatial agglomeration of physical capital, companies, consumers and workers:[7] • Low transport costs: physical proximity to other firms and centres
    of production can minimise costs associated with transportation.

  • The capital flow and technology industry is concentrated within specific areas, and therefore, it is to the advantage of the firm to locate near these areas.

  • As more firms in related fields of business cluster together, their costs of production tend to decline significantly (firms have competing multiple suppliers; greater specialization
    and division of labor result).

  • [1] Ellison and Glaeser argue that while this may be true for firms whose location decisions are highly sensitive to cost differences or geographic locations, such as the
    wine industry, they find that only 20% of geographic agglomeration effects in the United States can be explained by “natural” cost advantages.

  • [2] • Knowledge spillovers: the accumulation of knowledge and human capital in concentrated areas like major urban centres can contribute to the sharing of production technologies

  • [8] Moreover, other studies have shown that when negative externalities like pollution are taken into account, agglomerated city centres are more likely to be dispersed over
    a larger geographical area rather than be confined to a single, metropolis-like urban region.

  • This helps accumulate information and the flow of new and innovative ideas among firms to achieve what economists call increasing returns to scale.

  • New forms of technology can create problems and involve risk; the clustering of firms creates an advantage to reduce the uncertainty and complications involved with using
    new technology through information flow.

  • The over-agglomeration in the city would affect agricultural production and cause unemployment problems.


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