Urbanism as a cluster
Introduction
In urban economics, agglomeration economies refer to the benefits obtained by companies by locating in the vicinity of others ('agglomeration'). This concept is related to the ideas of economies of scale and network effects. As more companies in related "Cluster (industry)" fields establish themselves in contiguous areas, their production costs can decline significantly (companies have to compete for multiple suppliers; one result of agglomerating would be greater division and specialization in labor). Even when companies compete in the same sector agglomeration, there may be advantages because the group attracts more suppliers and customers than a company alone could achieve. Cities shape and expand agglomeration economies.
For their part, 'agglomeration diseconomies' are the opposite case. Additional competition decreases pricing power. From a spatial point of view, for example, the concentration of automotive-oriented industries in certain areas can create problems of overcrowding and traffic congestion. It is this tension between economies and diseconomies that allows cities to grow without becoming too large.
Agglomeration economies are closely associated with economies of scale and network effects mentioned above. A positive result, agglomeration economies, will only be achieved if the benefits outweigh the disadvantages. The definitive result of agglomeration economies is the formation and growth of a city.
The basic concept of agglomeration economies is that production is facilitated when there is agglomeration of economic activity. The existence of agglomeration economies is decisive in explaining how cities increase in size and population, which places this phenomenon on a larger scale. The concentration of economic activity in cities is the reason for their existence.
Advantages of agglomeration
When companies form clusters of economic activity, there are certain development strategies that flow in and through this area of economic activity. This helps accumulate information and the flow of new and innovative ideas between companies to achieve what economists call increasing returns to scale.
Increasing returns to scale, and economies of scale, are internal to a company and can allow the establishment of more of the same company outside the area or region. Economies of scale external to a company are the result of spatial proximity and are known as agglomeration economies of scale. Agglomeration economies can be external to a company but internal to a region. It is important to note that these increasing returns to scale are an important factor contributing to the growth of cities. Agglomeration economies exist when production is cheaper due to this grouping of economic activity. As a result of this grouping it becomes possible to establish other companies that take advantage of these economies without joining any large organization. This process can help urbanize areas.