URBAN ECONOMICS SPRING 2010 URBAN LOCATION PATTERNS STATIC

URBAN ECONOMICS SPRING 2010

URBAN LOCATION PATTERNS STATIC ANALYSIS Microeconomics: What is produced? How much is produced? At what price is it produced? Urban economics: Where do people choose to live? How do prices and quantity produced vary spatially within an urban area?

Land Market • Highly regulated • Land market determines both: - What is produced at a particular site; -How much is produced (per unit of land).

Land Market • The standard urban spatial model is known as the “monocentric city model”. • It is based on the assumption that the city revolves around a single center. • The single center is called: “Central business district” (CBD) • It is the center of the stylized city’s economic life.

Theory of Land Rent and Bid Rent Early theories of land rent: 1. David Ricardo (1821) Agricultural land Assump. : The land rent varies with fertility and fertility of land is not same at all locations. 2. Von Thünen (1826) Land varies in location but fertility remains same. Land rent varies by distance to marketplace.

Theory of Land Rent and Bid Rent • The fundamental concept used in theory of urban land market is “bid rent”. • Land rent • It is a market price. • Bid rent • It is a hypothetical price. • It can be thought of as a residual amount that is paid after all attributes of a location is considered.

Theory of Land Rent and Bid Rent • E. g. Bid rent for a business: Maximum rent per unit of land that it can pay for a particular urban site and maintain a given profit level. • E. g. Bid rent for a hh: Maximum rent per unit of land that the hh can pay to reside at location A and maintain some given level of utility.

Bid Rent Theory for Firms • Assumptions: A firm in an urban area 1. It produces a particular product to be sold for export at the port in the center of the urban area. 2. Firm occupies 1 unit (km sq. ) of land produces Q* units independent from the location. 3. Q=f(K, L, Land) 4. AC of labor and capital for each unit of output is “c”. 5. Output is sold at price “p” at the port. 6. Transportation cost (firm to port): t/km (for each unit of output) 7. Land rent that firm has to pay for per unit of land: R

Bid Rent Theory for Firms Bid rent function for the firm 1. If assumption 2 is valid: There is always a fixed ratio of output to land: Land cannot be substituted for other inputs. What are the implications on the bid-rent function? 2. If we release assumption 2: Firms can change the amount of K and L per unit of land. What are the implications on the bid-rent function?

Bid Rent Theory for Households • Assumption: Only attribute of land that matters to a hh is distance to the downtown workplace. • Greater distance to workplace has two costs: Time costs + Money costs HH bids less for land at greater distances to maintain its utility level. HH bid rent function will assume that utility will remain constant as the hh moves 1 km. Bid rent must adjust MB of distance to workplace to MC. MC of distance (time and money costs)= t

Bid Rent Theory for Households • Bid rent can also be a function of other variables: E. g. Distance to other employment centers. Quality of public schools Distance to shopping centers Distance from environmental disamenities (like air pollution, congestion, etc. )

Bid Rent Theory for Households • What happens to the bid rent function when commuting cost per km (t) decreases? HH at the CBD will not be affected but hh located farther away will be affected. Reduction in commuting costs: More money to spend on land other goods: Rents at all sites where x>0 will increase. Bid rent function rotates.

Bid Rent Theory for Households • Do different types of hhs have different bid rent functions? • Number of children • Rich and poor people