Take this post with a truckload of salt. This is a second in my series in which "Lost Macro Farmboy tries to get his head around Urban Economics". Think of it as sceptical pushback. I might easily be wrong, but those who know a lot more Urban Economics than I do should be able to explain why I'm wrong.
If the demand curve for X slopes up, a rightward shift in the supply curve of X (caused by relaxing legal restrictions on producing X) will cause a rise in the price of X.
Why might the demand curve for X slope up? One reason might be strong strategic complementarities, like network effects. The more people who own a phone, the bigger will be the benefit to me of having a phone, and the greater the price I would be just willing to pay to buy a phone.
Question: Why do cities exist? Why isn't population density the same everywhere inside any country?
I can think of two plausible answers:
- Natural geography matters. Countries are not flat featureless plains. Some places are more desirable than others to live and work. For example, you will tend to see cities located at natural harbours.
- Strong Strategic Complementarity. Let me explain what I mean by that.