The Demand for Cities

Summary

In this segment, economist Ed Glaeser introduces the fundamental concepts of urban economics using supply and demand graphs. He simplifies the model by assuming a city named Gotham with identical houses and equal commutes for all residents. The demand for living in Gotham is determined by the sum of wages and amenities, compared to the next best alternative city, Metropolis. The willingness to pay for housing, based on this sum, forms a demand curve. Glaeser explains how changes in wages, safety, and amenities can shift the demand curve, affecting housing prices in the city.

Takeaways

• 📈 The course aims to be engaging but also covers essential urban economics concepts through simplified visual aids like graphs.
• 🏙️ The demand for living and working in a city, exemplified as 'Gotham,' is based on the sum of wages and non-wage benefits, or 'amenities,' relative to other places.
• 🏘️ The demand for housing in a city is represented by a downward-sloping demand curve, showing the varying willingness to pay among potential residents.
• 💼 Wages and amenities, such as traffic congestion and restaurant quality, are considered in the context of the next best alternative city, 'Metropolis'.
• 📊 The demand curve is continuous, assuming technical conditions that prevent it from having jumps or discontinuities.
• 🏡 The city's housing price is determined by the willingness to pay of the marginal resident, with a fixed number of homes implying a capped population.
• 💰 An increase in city wages or improvements in city amenities shifts the demand curve upward, leading to higher housing prices without an increase in population.
• 📉 Conversely, a decrease in city wages or amenities shifts the demand curve downward, reducing housing prices.
• 🔄 The script suggests a static model where residents move once and live forever, with homes having a perpetual lifespan.
• 🔄 The discussion on housing prices considers both home purchase prices and rental prices, acknowledging the complexity of housing markets.

Q & A

What is the primary purpose of the economics videos mentioned in the script?

The primary purpose of the economics videos is to provide the basic concepts of urban economics, stripped of history and pictures, using only a few graphs as visual aids.

Why does the speaker feel morally compelled to present the economics concepts in a certain way?

The speaker feels morally compelled to present the economics concepts in a straightforward manner because they believe it is essential for understanding how economists truly approach cities.

What tool is fundamental to understanding the demand for living and working in a city according to the script?

Supply and demand graphs are fundamental to understanding the demand for living and working in a city.

What is the hypothetical city called in the script where the demand for living and working is being discussed?

The hypothetical city is called 'Gotham' in the script.

What assumptions are made about the houses and commute in Gotham for the sake of simplicity?

It is assumed that every house in Gotham is the same and everyone faces exactly the same commute.

What are the two benefits each person gets from living in Gotham according to the script?

Each person gets a wage and a flow of non-wage benefits, which are called amenities.

What factors are included in the term 'amenities' as described in the script?

Amenities include all the good and bad things related to living in the city, such as traffic congestion, cool restaurants, and personal preferences like proximity to family.

How is the willingness to pay determined for living in Gotham according to the script?

The willingness to pay is determined by the sum of wages and benefits relative to the next best place one could live, such as Metropolis.

What does the demand curve represent in the context of housing prices in Gotham?

The demand curve represents the price of housing in the city, with the willingness to pay of the millionth person indicating the price of a home.

How does an increase in wages for everyone in the city affect the housing prices according to the script?

An increase in wages for everyone in the city causes the demand curve to shift up, leading to a rise in housing prices, which rises enough to offset the increase in incomes.

What happens to the demand curve and housing prices if the city becomes safer or more pleasant?

If the city becomes safer or more pleasant, the demand curve will also rise, causing housing prices to rise in turn.

What would cause the demand curve to shift down and what is the effect on the city's housing prices?

The demand curve shifts down if amenities or income in the city decline, which results in a fall in the city's housing prices.

Outlines

00:00

🏙️ Introduction to Urban Economics

The speaker, ED GLAESER, sets the stage for a segment of the course that delves into urban economics, acknowledging the dry nature of the subject but emphasizing its importance. He introduces the concept of demand for living and working in a city, using a hypothetical city called 'Gotham' to simplify the discussion. The demand is visualized through a demand curve, which is constructed by considering the willingness to pay of individuals, taking into account wages and non-wage benefits (amenities). These benefits include a range of city-related factors such as traffic, restaurants, and personal preferences. The speaker explains how the demand curve can be used to determine housing prices, assuming a fixed number of homes in the city.

Keywords

💡Economics

Economics is a social science that studies the production, distribution, and consumption of goods and services. In the video, the speaker, an economist, uses economic principles to analyze urban development and the factors that influence people's decisions to live and work in cities. The term is foundational to the video's theme, as it sets the stage for understanding the economic forces at play in urban settings.

💡Urban Economics

Urban Economics is a subfield of economics that focuses on cities and urban areas, examining issues like housing, transportation, and land use. The video's content is centered around urban economics, as it discusses how economic theories can be applied to understand the dynamics of city living, including the demand for housing and the factors that affect it.

💡Supply and Demand

Supply and demand is a fundamental economic concept that describes the relationship between the quantity of a product that producers are willing to supply at various prices and the quantity that consumers are willing to purchase. In the script, the speaker uses supply and demand graphs to illustrate how the market for housing in a city works, with the demand for living in a city driving up housing prices.

💡Metropolitan Area

A metropolitan area, often referred to as a metro area, is a region consisting of a densely populated urban core and its surrounding territories. The video uses the fictional region 'Gotham' to represent a metropolitan area, exploring the economic factors that influence people's decisions to live there, such as wages and amenities.

💡Wages

Wages refer to the compensation paid to employees for the work they do. In the context of the video, wages are one of the factors that contribute to the demand for living in a city. Higher wages can increase the willingness of people to pay more to live in a city, thus affecting housing prices.

💡Amenities

Amenities are the non-wage benefits that people receive from living in a particular location, such as access to parks, cultural attractions, or good schools. The video discusses amenities as a component of the overall attractiveness of a city, which can influence the demand for housing and, consequently, housing prices.

💡Demand Curve

A demand curve is a graphical representation that shows the quantity of a good or service that consumers are willing and able to purchase at various prices, all else being equal. In the video, the speaker constructs a demand curve for housing in the city of Gotham, using it to explain how the willingness to pay for housing translates into housing prices.

💡Housing Prices

Housing prices refer to the cost of purchasing a home or the rent for a dwelling. The video uses housing prices as a key indicator of the economic dynamics within a city. The speaker explains how factors like wages, amenities, and the fixed supply of housing influence housing prices through the demand curve.

💡Population

Population in this context refers to the number of people living in a particular area, such as a city. The video assumes a fixed population for Gotham to simplify the analysis, highlighting how a fixed number of homes can lead to higher housing prices as demand increases.

💡Income

Income is the money received on a regular basis for work or through investments. The video mentions income as a factor that can shift the demand curve for a city. An increase in income can lead to a higher demand for housing, as people are willing to pay more to live in a city with higher earning potential.

💡Technical Assumptions

Technical assumptions are the underlying conditions or simplifications made for the sake of analysis in economic models. The speaker mentions making technical assumptions to ensure the demand curve is continuous, which is necessary for the economic model to function properly. These assumptions help to create a simplified model that can be used to understand complex economic phenomena.

Highlights

Economics is often called the dismal science due to its focus on numbers and graphs.

The course aims to be fun and visually engaging, but also includes fundamental concepts of urban economics.

Supply and demand graphs are a fundamental tool in economics and can be applied to understanding cities.

The demand for living and working in a city is influenced by wages and non-wage benefits, or amenities.

Amenities include all aspects of city living, such as traffic congestion, restaurants, and personal preferences.

Wages and benefits are measured relative to the next best alternative place to live.

The sum of wages and benefits reflects an individual's willingness to pay to live in the city.

People are sorted by their willingness to pay, creating a demand curve for the city.

The demand curve can be visualized as a series of bars representing individuals from highest to lowest demand.

The housing price in the city is determined by the willingness to pay of the marginal household.

The number of homes is assumed to be fixed, capping the city's population.

An increase in wages for everyone in the city would shift the demand curve up, raising housing prices.

Improvements in city safety or pleasantness would also increase demand and housing prices.

Decreases in city amenities or income would shift the demand curve down, lowering housing prices.

The demand curve provides insight into what factors would cause it to shift up or down.

The discussion assumes a static model where people move once and homes last forever.

Transcripts

ED GLAESER: Much of this course is meant to be fun and visually arresting.

But I am an economist, and economics isn't called the dismal science for nothing.

I feel that I am morally compelled to give you the basic concepts of urban economics,

stripped of history and picture and with only a few graphs as visual aids.

These videos are going to be shorter, they are the boring bits.

If you think economics is a bore you can skip them.

But if you want to know how economists really approach cities

then these videos are for you.

Any of you who have taken economics 101 in either high school or

college will have been exposed to supply and demand graphs.

They are a fundamental tool, and we can use them to think about cities as well.

Let's start with the demand for living and working in a particular metropolitan area.

We'll call the region Gotham, for lack of any imagination.

And we'll make our lives easier by assuming that every house in Gotham

is the same.

And everyone faces exactly the same commute.

The simplest way to think about demand is to imagine that there are a couple of

hundred million people who might potentially live in the city.

Each person gets two benefits from being in Gotham.

A wage and a flow of non wage benefits, which we'll call amenities.

Those amenities roll together all of the good and

bad things related to living in the city, traffic congestion, cool restaurants, and

personal things to perhaps like proximity to a parent or a child.

These wages and benefits all need to be measured, relative to the next best

place that the people could possibly live, say, Metropolis.

The sum of wages and benefits relative to Metropolis

reflects the willingness of a person to pay to live in the city.

That willingness to pay represents individual demand for Gotham.

We then sort people on the basis of their willingness to pay and

use bars to represent each person from the highest demand to the lowest demand.

So if the highest payer is willing to pay $1 million, and the next payer is willing

to pay $900,000 and so forth, we could get a series of bars that go downward.

Now make the bars tinier and tinier because you've got so many people, and

as they smoosh together you end up getting a nice, continuous demand curve.

Maybe it's a straight line, or maybe it's a curve.

We need technical assumptions to assure that this curve is continuous,

that it doesn't jump, but I'm happy to make those assumptions.

Normally, we'd have to join this curve with a supply curve but

we'll get to that later.

For now, let's just assume that Gotham has a fixed number of homes for people, so

the population is capped at, I don't know, a million.

So then we can use this curve to figure out what housing prices are going to be.

Find the spot on the curve that denotes the willingness to pay for

the millionth person, here it is.

And that willingness to pay denotes the price of housing in the city.

I'm being a little sloppy about dynamics here

since the price of housing could either be a home price or a rental price.

But let's assume that everyone just moves once, lives forever, and

their home lasts forever too.

Then if this willingness to pay is the lifetime value of living in the city,

then the demand curve tells us the price of a home in that city.

We now have a demand curve and

a pretty good guess about what would make it shift up or down.

If wages in the city rise for everyone, then demand goes up.

Since the number of homes is fixed,

the population of the city won't rise, it would if there was a proper supply curve.

But the price of housing in the city will rise, and

it will rise exactly enough to offset the increase in incomes.

Similarly, if the city becomes safer or more pleasant,

the demand curve will also rise and prices will rise in turn.

If amenities or income in the city decline,

then the demand curve shifts down, and the price of the city falls.