Local Production and Consumption

Substitutability, Saturation, and the Regional Economy


A factory, using labor and other inputs, produces a commodity for sale to farms that replaces local production. Because of transportation costs (including shipping costs and commuting cost), the factory purchases inputs (including labor) and sells its product within a market area. In so doing, the factory leads to a rearrangement of local production and consumption. As a monopolist, the firm sets price knowing this affects the locations of consumers as well as their demands. In Model 12A, the behavior of the farm in autarky is examined. In Model 12B, I consider a farm within the market area of the factory. In Model 12C, I introduce a monopolist with constant marginal cost. In Model 12D, the monopolist, also a monopsonist in its market for labor, sets an f.o.b. wage to attract labor to work in the factory. In Models 12B through 12D, I explore the significance of having a saturated market area wherein farm demand for the commodity is price inelastic. The models in this chapter build on  Chapter 2 and  11 in that they introduce substitution between a locally produced good and the factory good. This allows us to better understand the role of market saturation and its impact on decisions by the monopolist regarding wage and price as the regional economy grows. Unlike  Chapter 11, this chapter allows us to see how prices and localization get jointly determined in a regional economy when the firm is able to exploit the monopoly advantage created by a geography.


Shipping Cost Regional Economy Price Discrimination Wheat Production Market Area 
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Copyright information

© Springer Science+Business Media, LLC 2010

Authors and Affiliations

  1. 1.Department Social SciencesUniversity of Toronto ScarboroughTorontoCanada

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