REM 520 Chapter 2: ch 2-Why do Cities Exist
18 Nov 2017
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Cities exist because individuals are not self-sufficient. Backyard model implies that cities don"t exist and every consumer is also a. Consider a region that produces and consumes only bread and shirts. Eliminates the possibility of exchange and guarantee that each household will be self-sufficient. If you specialize in bread then trade for shirts, you would incur a transaction cost equal to the product that could be produced in the time required to execute the trade. No benefit from specialization as everyone is equally as productive. A region has a comparative advantage in producing a particular product if it has a lower opportunity cost. Comparative advantage may lead to specialization and trade. The transaction cost is the opportunity cost of the time required to exchange products and is equal to the amount of output that could be produced during that time. Second assumption of the backyard production model is that there are constant returns to scale in exchange.
