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Two agglomeration economies: conditions needed for their formation and benefits that allow them to thrive - Term Paper Example

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Two agglomeration economies: conditions needed for their formation and benefits that allow them to thrive

The concept of agglomeration in economics has always been confined to urban economies. The theory describes the advantages which firms experience when they settle in a closed regional periphery in proximity to each other. Agglomeration economies justifies the clustering of firms together by focusing on lower the cost of production resulting from easy availability of multiple suppliers and scope for specialization of labor according to their skill-set. Owing to agglomeration economies, people and firms give attention to a particular region of operation or a specific geographical region.The basic perception of agglomeration economies is facilitation of production when economic activity is clustered and such notions are developed to suffice the ultimate end of forming and developing a city. Multiple factors like types of economies formed, network connections, and the advantages and disadvantages that may result in the growth of cities.Two distinct types of agglomeration economies are operating in the global economic domain: urbanization economies and localization economies. An urbanization economy is related to city's population and level of employment along with the multiplicity of its productive constitution. On the contrary, a localization economy is associated with a city's specialization in one specific segment.According to Sassen producer services, unlike other types of services are mostly not as reliant on the proximity of the buyers as consumer services. Thus, concentration of production in suitable locations and export, both regionally and internationally are feasible. Production of these services benefits from the nearness to other services, especially when array of specialized firms are available. These firms obtain agglomeration economies when they settle in the vicinity of the others that are sellers of key inputs necessary for combined production of certain service offerings. This is a valid reason for New York's losing of corporate headquarters for the past few decades and the number and employment of firms which were servicing such headquarters went on increasing rapidly.

Sassen also highlighted another kind of agglomeration economy which comprises amenities and lifestyles which large urban centers can offer to the affluent employees engaged in the producer services. The very fact that producer services are comparatively independent of proximity to the buyers which combines with the existence of agglomeration economies at the point of production makes both the concentration of production in suitable locations and the export to other possible areas. It is thus common to see New York and London as global centers while Denver and Birmingham as the regional centers. (Sassen, 2001, pg 104)


An agglomeration economy exists when production is cheaper because more activity is going on nearby. With agglomeration economies, economies of scale are in the air and people can take advantage of them even without engaging themselves in big firms. In broad spectrum, Agglomeration economies have two varieties, and the economies that arise from having multiple organizations dealing with the same industry are referred to as localization economies. Large cities like Cambridge and Massachusetts have wide range of high-end bookstores and computer stores. This is not because they are large cities with a considerable number population, but because these two cities house many universities and consulting firms. This is a perfect specimen of a localization economy.

Suggests that urbanization economy is the other important side of agglomeration economies that arises from having a huge assemblage of people residing in ...Show more

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The concept of agglomeration in economics has always been confined to urban economies. The theory describes the advantages which firms experience when they settle in a closed regional periphery in proximity to each other…
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