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Market Areas and Systems of Cities. Chapter 3. Deriving a quantity-distance function. Demand cone. Demand cone shows the quantity that a spatial monopolist sells to people who live at each distance from its location. Volume of a demand cone is the firm’s total revenue. Demand cone.

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Market Areas and Systems of Cities

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Market Areas and Systems of Cities

Chapter 3

1


Deriving a quantity-distance function

2


Demand cone

  • Demand cone shows the quantity that a spatial monopolist sells to people who live at each distance from its location.

  • Volume of a demand cone is the firm’s total revenue

3


Demand cone

4


Market area of spatial monopolists

5


Overlapping market area of two spatial monopolists

6


Evolution of circular market areas into hexagonal market areas

7


Honeycomb of long–run equilibrium market areas

8


Threshold size market area

  • The size of the market area that only allows a firm to earn normal profits: no excess profits.

  • Each industry has a different size market area.

9


Effect of threshold market area on spatial monopolist

10


Overlapping market areas for three different industries

11


Central places

  • Smallest are order 1, and provide level 1 goods (basic needs) to its residents.

  • Level 2 goods are provided by an order 2 city to its residents and to residents of smaller cities.

  • All centers of higher order also provide goods of lower levels to the residents.

12


13


14


15


Instability of urban hierarchies

  • Primarily due to changes in transport and communication systems

  • Better roads and better communication systems in general cause large cities to grow, and smaller ones to die more quickly

16


Studying competing centers

  • Fetter’s law of market areas:

  • Ignores retail agglomeration economies of larger cities

  • Data expensive to gather.

17


Reilly’s Law of Retail Gravitation

  • No theoretical model

  • Two competing centers will attract consumers from a third location in direct proportion to their respective sizes and in inverse proportion to the relative distances to the consumers’ locations

  • Larger cities have wider markets

  • Cannot account for effect of lower prices in smaller towns

18


Rural cities and economic growth

  • Small cities are not good catalysts for economic growth.

  • Small cities are associated with smaller multipliers.

  • Spending through small cities benefits the larger cities in that hierarchy

19


Limitations of Central Place Theory

  • Assumptions underlying urban hierarchies never conform perfectly to the model

  • Central place theory explains pre-Industrial Revolution urban systems

  • Applies mainly to shopping models

20


Limitations of Central Place Theory

  • Goods/ideas never flow up the hierarchy

  • Theory lacks an equilibrium

  • Ignores results of local trade restrictions and artificial barriers of doing business (linguistic, political boundaries)

  • Ignores diseconomies of agglomeration that may cause people to want to move to lower-order places.

21


Implementing Riley’s Law

  • Calculate the market area boundaries.

  • Approximate the trade area population.

  • Calculate the trade area capture (TAC) to determine the number of “customer equivalents” served by that industry.

  • Determine the pull factor to see if the area is attracting people from outside its region or losing customers to another region.

  • Forecast potential sales.

22


Calculate the market area boundaries

  • Distance from the smaller city to the trade area boundary:

23


24


Map of Adamsville and surrounding minor civil divisions

25


26


Minor civil divisions within the trade area for Adamsville

27


Trade Area Capture

  • Number of customer equivalents =

28


Pull Factor

  • Pull factor > 1: area is serving customers from outside its nature trade area boundaries

  • Pull factor = 1: area is only serving local customers

  • Pull factor < 1: some customers going elsewhere to shop.

29


Potential sales

  • Note: per capita means divided by population.

30


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