Question

Profit maximizing firms have an incentive to spread out to avoid competition. Nevertheless, an ever greater share of economic activity is found in metropolitan areas. What are the forces that encourage firms to agglomerate? Discuss why these forces have outweighed the dispersive forces in the last half century.

Answer 1

Introduction

Over the years, trade and globalization has led to companies forming their business across the globe thus being able to maximize on its overall profit.

Trade has grown in volume by great numbers and has been able to sustain the long term goals of the companies and the economy as a whole.

That said however, there is a growing trend of companies to agglomerate in a particular location even when expanding to different countries all have thought to be forming their offices in areas which are relatively similar which is why the development in some areas is relatively way higher than in others respectively.

On the other hand, though profit maximizing firms can opt to spread in newer areas they still won’t do it and this is a relevant trend this happens because of the following reasons.

Reasons:-

The major reasons for this occurrence to happen be that in most countries and cities some resources are centered best in a particular location. These resources are basic to the nature of the industries in which the companies operate in. These could be infrastructural support, transport and the kind of employees which the company seeks.

Therefore, most companies such as Information Technology Giants like to keep their offices relatively in areas where availability of the above listed factors is relatively higher.

On the other hand, though setting up a plant in a relatively distant location may offer some aspect to be better like no or lesser competition, but this necessarily does not translate to higher profits since other factors such as non-availability of infrastructure, decreased demand, and reluctance among people to come and work there are strong forces which prevent companies for entering such areas.

Therefore, to make benefits from the above listed arrangements, most companies prefer to agglomerate and have facilities close by than spread them in far areas in which profitability is not certain respectively.

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