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Political Science
Harald Bathelt

LECTURE 2 NOTES Institutions Market Interaction and Spacial Equilibriumneo classical economics transactions are led only by price signals there is no other interaction between producers and consumersassumption that each decision is for profit maxin the market economy market and price signals determine the eqin planned economy such as post war Europe eq is determined by the state usually a political component to thisproblem with this is difficulty of government in determining appropriate eq for every productSpatial Equilibrium Assume there are two regions core and periphery 2 factors labour and capital and goods are mobile In the periphery low wage labour and large labour force with specialization whereas core has low interest rates and cheaper capital intensive processesbecause goods are mobile in our example the periphery trades labour intensive products and core trades its capital intensive products the demand then increases for both products wages increase and interest rates rates capitallots of reasons why this model does not work also Production FactorsLANDmost basic used for everythingresults in competition for landfor example Shangai fertile land used for industrialresidential useit is also a source of resources iron and coal needed for all other productionsLABOURanother necessary factor to process raw materialsdivision of labour increases productivityhuge governance challenge with division of labour to make sure all the pieces of the production processes come together perfectlyCAPITALvery broad area of production factorscapital equipmentsocial capital good team work without stars end up working better then very good agents not getting along wellethnic communitieshuman capital knowledgecharacteristics of knowledgehard to put a price on knowledgeyou pay a price for a solution without knowing it then why would you pay if you know the solution Institutions and Economic Interactioncoordinate different institutions for division of labourhave to be able to communicate and understand terms and language with different firmsinstitutions are intended or unintended stabilizations of social and economic interactions and related behaviourrules are not necessarily institutions because not everyone follows it the speed limit may be 100 but everyone drives 120institutions are the interactions based on laws and ruleslaws are not institutions only once they become practices can they be considered institutionssome economists have negative view of institutions because they limit choices and opportunities but without institutions there is no interaction whatsoeverFORMAL INSTITUTIONS interaction based on lawsINFORMAL INSTITUTIONS based on norms and traditionsconventions become formalizedare market institutions no they are organizations of how trade is organized but if we think about the rules they produce between consumers and firms that is the institution Institutions in Spatial Perspective for new industries common practices may develop unofficially first before those standards are taken to become rigid rules gives advantage to the firms that are in the centre of developing these processes INSTITUTIONAL HYSTERESISinstitutions change incrementally based on previous action they do not have a specific long term equilibriumhysteresis is term for impact that is still present even though the cause is long goneWhy at some institutions set up in some way where they are clearly inefficientfor example the qwerty keyboard PERSISTENCE AND CHANGE OF INSTITUTIONSlock in effect could be too difficult to break out ofwith inter relatedness it would cost too much to change again look at the qwerty keyboardbandwagon effect following a swarm of inefficient choiceswhy are these inefficient institutions created in the first place due to hostile selection environment for efficient institutionsits like being at the top of a smaller mountain and to be more efficient you would have to climb down your mountain and climb the bigger one job losses total structure reconstructionPRISONERS DILEMMA for a single firm it might be risky if others do not follow the more efficient way then it will lose only if they all switch then they will all be better offEXAMPLE left and right side trafficorigin is use of horse drawn carriages so the whip would not hit the passengersobviously the purpose is not fulfilled anymore but the practice became set so did the rules between Germany and Englandnow there is a lock in which is not optimal costs huge amount of money to switch trucks from Germany and England INNOVATIONS AND INSTITUTIONSinstitutions are persistent and do not change easilypositive lock in creates stabilitynegative lock in agents rely on existing institutions and do not recognize potential for changedesign elements way of mediating between old practices and potential for new technologya new product design has to combine the familiarity of the old with the pros of the newusers may not recognize the benefits of the new without the familiarity of the oldINNOVATION is being able to bring it to the marketuse of SKEUMORPHS design elements which are tied up to existing patternsinstutions eg waste paper basket in windows helps with new technology so you do not have to explains themWeek 3 Classical View of Industrial Location and Policy Lecture Notes1 Traditional cost minimizationWeber 1909 viewed industrial location decisions as optimization processesFigure Webers location triangleFinding the spot P where the materials are transported to be made into a productThe products or materials you do not need do not have to be transported to the marketsaving the cost of transportation If you have an access to the localized materials it even more lowers the cost of transportationThe spot where the transportation costs are most minimized is where the consumption point relies K final product and consumption pointoptimum point P Production processAssumption of Webers analysisOne singleplant firm looks for an optimal locationTwo raw materials are used to produce one productTransport the two materials into a spot where the product is madeTechnologicalspatial conditions do not differ between placesM1M2Ka Step 1 only transportation costs are variable Search for a location that minimizes transportation costsIt is to be found within the socalled location triangle Location decision depends on the characteristics of raw materials Ubiquities Localized materials pure vs gross localized materialsb Step 2 introducing spatially variable labour costs
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