Geography Reference
In-Depth Information
Equilibrium interregional wage gradient
Wage
w
*
-$20
-$50
-$80
distance
-$100
C
D
E
F
K*
G
H
I
J
distance
Figure 3.8
Interregional equilibrium wage gradient
willing to relocate away from
K
* is exactly that change in factor prices
which makes the firm indifferent between
K
* and another location. The
local factor price change relative to the prices at
K
* is the change which
ensures that the firm's profits will be exactly the same in all locations as
that of
K
*. In other words, the critical variation in local factor prices rela-
tive to the local factor prices at
K
* is such that the local labour and land
factor input prices at each location exactly compensate for the increased
total transport costs associated with each location. Therefore in Figure 3.7
this allows us to plot the labour and land price gradient with respect to
distance which ensures equal profits are made at all locations east of
K
*,
assuming the wage at
K
* is
w
*.
We can repeat the same exercise by drawing a line from
K
* which passes
west through
F
,
E
,
D
and
C
, and plotting the local factor prices which
will ensure the firm makes profits equal to at
K
* at all locations west of
K
*. By combining all of this information we are now able to construct the
interregional factor price gradient for a particular firm which ensures that
the firm makes equal profits at all locations in the east-west direction as it
would being located at
K
*. This is shown in Figure 3.8.
This slope of the line in Figure 3.8 defines the interregional
equilibrium
factor price gradient for this particular firm along this particular axis,
in which the firm is indifferent between all locations along the east-west
line between
C
and
J
as the profits that the firm can earn are the same
everywhere along this line. Moreover, although in Figure 3.8 here we only
have a one-dimensional framework, in principle using exactly the same
logic we can also construct similar factor price gradients for movements
in any other direction away from
K
*. This allows us to generate a two-
dimensional equilibrium factor price map of the whole spatial economy.
