Economies of Agglomeration - Source of Economies

Source of Economies

From the localization of firms emerges labor market pooling. Large populations of skilled laborers enter the area and are able to exchange knowledge, ideas, and information. The more firms there are in this area, the greater the competition is to obtain workers and therefore results in higher wages for the workers. However, the fewer firms there are and the more workers there are at a location the lower the wage becomes for those workers.

The second contribution towards localization economies is the access to specialized goods and services provided for the clustering firms. This access to specialized goods and services are known as intermediate inputs and provides increasing returns to scale for each of the firms located within that area because of the proximity to available sources needed for production. If intermediate inputs are tradable, there forms a core-periphery notion that will have many firms locate near each other to be closer to their needed sources. If there are tradable resources and services nearby but no related industries in the same area, there are no networking linkages and therefore makes it difficult for all firms in the area to obtain resources and increase production. The decreased transportation costs associated with clustering of firms leads to the increase in likelihood to a core-periphery pattern; where the result of this will be more intermediate inputs will be focused at the core and therefore will attract more firms in related industries.

The third source relating to localization economies is technological spillovers. One final advantage of this source is that clustering in specific fields leads to quicker diffusion of ideas or adoption of ideas. In order for production to be at its maximum and sell their products, firms require some sort of feasible access to capital markets. New forms of technology can create problems and involve risk; the clustering of firms creates an advantage to reduce the amount of uncertainty and complications involved with the use of new technology through information flow. The industry of capital flow and technology are concentrated within specific areas and therefore it is to the advantage of the firm to locate near these areas. This technological impact specifically in the communications field will provide and dismiss the barrier between firms in the same industry located further away as well as nearby which would lead to a greater concentration of information flow and economic production and activity. Furthermore, technological spillovers may be more beneficial to smaller cities in their growth than larger cities because of the existing informational networks in larger cities that already helped them to form and grow.