Bid Rent

Assume
for a moment, we live a life of not having the knowledge of cities. Population
are dispersed evenly, with population density equal in all areas.
Transportation to work do not exist because everyone works from home. Exchange
of goods occurs instantly and at zero cost, no matter the distance. This
assumption cannot exist because we cities existing, exchange is costly and
dense area stand alongside spares ones.

The
major reason of assuming a life without cities capitalizes on transportation
costs. While movement of people and things across space is costly, cities allow
us to congregate in order to exchange the goods and services we need. There is
an economic advantage to agglomeration, leading firms and household to compete
for the scarce supply of urban land.

This
competition creates rent disparities across space, as the price of
advantageously located property is bid up relatively to other areas. Urban
economist notice this disparities and brings up the theory of bid rent theory
considering the two major competing variables “land use and land value”.