Lecture 4.

Urban spatial structure

September 29, 2015

1 The Von Thunen model

1.1 The basic model

The Von Thunen model of 1826 is a basic and historically one of the rst models
of urban structure. It actually focuses on the analysis of the spatial structure
of agricultural activities rather than typically urban activities, however it helps
develop important spatial insights and forms important ideas used in more so-
phisticated models of urban structure.
We will suppose that farmers can grow 1 ton of wheat using 1 hectare of
land. This ton of wheat sells for $100 in the market that is located in the city
closest to farmers' plots (this price of wheat is net of variable material costs,
so it is in fact value added rather than pure revenue). To produce 1 ton of
wheat, farmers have to spend $50 on non-land inputs. It costs $1 per kilometer
to transport 1 ton of wheat to the market. With this setup, we can build the
following model:

AR = 100

AC = 50 + 1 · d = 50 + d,

where d is the distance that wheat must travel from the eld to the market
(the market is at the origin).
We can then nd average gross prot (before rent payment):

AΠg ≡ AR − AC = 100 − 50 − d = 50 − d

This gross prot will reect the maximum amount that farmers will be pre-
pared to pay in rent to their landlords. Therefore, we can write:

Rmax = AΠg = 50 − d

1
Figure 1: Maximum land rent as a function of distance from the market
in Von Thunen's model. Land within 50 kilometers from the market
is under cultivation (is used in the production of wheat), and the
maximum rent rate at 20 km from the market is $30.

Figure 2: Maximum land rent schedule after the market price of 1 ton
of wheat has increased from $100 to $150. The Rmax function will have
changes, respectively, from Rmax = 50−d to Rmax = 150−50−d = 100−d.
The cultivated area expands from 50 km to 100 km from the market,
and the maximum land rent rate at 20 km from the market is now
$80 instead of $30.

2
Figure 3: Maximum land rent schedule after the costs on non-land
inputs increases from $50 to $100 per ton of wheat produced. The
Rmax function changes, respectively, from Rmax = 100 − d to Rmax =
150 − 100 − d = 50 − d. The cultivated area shrinks from 100 km to 50
km from the market, and the maximum land rent rate at 20 km from
the market is now again $30 instead of $80.

Figure 4: Maximum land rent schedule after the rate of transport costs
has fallen to $0.5 per ton of wheat per kilometer. The Rmax function
changes, respectively, from Rmax = 50 − d to Rmax = 50 − 0.5d. The
cultivated area expands from 50 km to 100 km from the market, and
the maximum land rent rate at 20 km from the market is now $40
instead of $30.

3
1.2 Changes in parameters in Von Thunen's model
How will the maximum rent that farmers will be prepared to pay respond to
changes in dierent parameters of the model?
1. Historically, who were the largest landlords? 2. Would landlords be
interested in building roads in their lands? 3. Would they be interested in
attracting new people to towns located on their lands?

1.3 Competing land uses in the Von Thunen model

Let's say that in the vicinity of a market, farmers can choose to grow one of
two crops: wheat or rye. We will also assume that wheat sells in the market for
$150, while rye sells for $100; transport costs are charged at the same rate for
either of the crops at $1 per ton per kilometer; costs associated with non-land
inputs are $50 per ton of either crop. In this case, there will be no rye produced
anywhere in the vicinity of the market.

ARwheat = 150

ACwheat = 50 + d

wheat
Rmax = Pgwheat = 150 − 50 − d = 100 − d

ARrye = 100

ACrye = 50 + d

rye
Rmax = Pgrye = 100 − 50 − d = 50 − d

2 The bid-rent model

2.1 The bid-rent model for rms

2.1.1 The basic model

In the Von Thunen model, it is assumed that the proportions of various factors
of production are xed: you can only produce so much wheat, rye or some other
good using 1 hectare of land. A more comprehensive model should be able to
account for the possibility of factor substitution. The bid-rent model is exactly
of this type.
We can put a parallel between two pairs of models: the Weber/Moses models,
on the one hand, and the Von Thunen/bid-rent models, on the other hand. One

4
Figure 5: No rye is produced in the vicinity of the market under the
above assumptions, because gross prot is lower for rye than for wheat
at all locations, and therefore it is not feasible to produce rye, given
that landlords will require the same rent for rye-occupied elds than
for those used in the production of wheat. The whole circular area of
radius 100 km surrounding the market is dedicated to growing wheat

5
Figure 6: Plots closest to the market will be used for the production
of wheat, whereas further plots will be dedicated to growing rye with
the rates of transport costs for wheat and rye at $2 and $0.5 per ton
per kilometer, respectively, with all other parameters held unchanged
wheat
compared with the previous case. Rmax = 150 − 50 − 2d = 100 − 2d,
rye
Rmax = 100 − 50 − 0.5d = 50 − 0.5d. The two lines cross at the distance
of 33.33 km. Thus elds located within 33.33 kilometers from the
market will be used for growing wheat, whereas elds located at the
distances of 33.33 to 100 kilometers from the market will be given to
growing rye.

6
Figure 7: A typical bid-rent curve. The possibility of input substitution
makes the bid-rent curve convex

model in each pair assumes zero elasticity of substitution, whereas the other
model assumes that substitution is possible.
Because of the existence of transport costs, the closer to the market, the more
expensive will be land rent. This will mean that a representative rm will be
facing dierent slopes of isocosts in dierent locations (relative to the market).
But that will mean, according to the well known microeconomic results, that the
rm will be using dierent combinations of land and other inputs in dierent
locations. The closer to the market, the more expensive land will be, and
respectively, the less land and the more of other inputs will be used by the
representative rm. For the same level of output then, rms will be using more
land the further away from the market they are located. This means that the
rental price per hectare, which should obviously be proportional to S1 , where S
is the area in hectares of land used to produce a given amount of a good. This
already speaks for the hyperbolic form of the curve reecting rents as a function
of distance from the market. The fact that input substitution will take place
along a convex curve (which we know from microeconomics) will be just another
factor determining the convex shape of the rent curve in the bid-rent model.

2.1.2 Land competition in the bid-rent model

Should there be two types of producers, those with with non-zero elasticity
of input substitution and those with zero input substitution, and given there
are enough producers of the elastic type, all land will be rented out to such
producers, since they will be able to pay higher rents due to their ability to
substitute factors.
If there are several industries, whose typical production functions show vari-
ous degrees of ealsticity of input substitution, then the bid-rent model provides
an explanation of why these industries tend to locate in various parts of cities.

7
Figure 8: Firms who are able to substitute inputs will dominate the
land market

E.g., let us say that there are four industries, along with the agricultural sector:

1. Services industry, very elastic with respect to land.

2. Retail sector, requiring larger areas still relatively exible.

3. The manufacturing sector, yet less elastic and in need of good transport
links with the outside world.

4. The distribution sector, very demanding of space and transport links.

5. The agricultural sector.

8
Figure 9: The lower the elasticity of input substitution for an industry,
the further from the central business district (CBD) it will be located

Figure 10: An example: Bangalore zoning

9
2.2 The bid-rent model for households
With households, the bid-rent model is very similar to that for rms. It shows
how rents dier in a city/region, depending on the distance from CBD.

Figure 11: Residential land allocation with three income groups and
high space preferences (typical for many US cities)

10
Figure 12: Real estate price map for Detroit, MI metropolitan area

11
Figure 13: Residential land allocation with four income groups and
high space preferences for all but the young (with low income coming
next - a possibility that seems to rarely occur in reality)

12
Figure 14: Residential land allocation with three groups and high CBD
accessibility preferences (often found in cities with highly congested
trac)

2.3 Expansions of the bid-rent model

Both in the rm context and in the household, it is very likely that land is not
homogenous, as has been assumed so far. If there are parks/scenic views, etc.
in the household model, or major road junctions and railroad stations in the
rm context, they will be attracting respective groups of households or rms,
so there will be humps in the graphs.

Figure 15: A park or some other nice amenity (or, on the contrary, a
high level of polluttion in the CBD) may change the bid-rent curves

There may always be secondary business districts in a city - they will also

13
change bid-rent curves.

Figure 16: The bid-rent curve with secondary business districts

2.4 Building height distribution

In many cities of the world, a pronounced pattern can be seen: the CBD contains
skyscrapers, and average building heights fall as we move further from the CBD.
This can easily be explained using the bid-rent model together with the model
of isoquants for the building/development industry.
It is safe to assume that taller buildings require more capital than lower
buildings (because their bases must be stronger, their walls must be enforced,
various expensive security systems must be installed, etc.). Therefore, it will
make sense to build higher buildings in places with higher land rents - that way,
the technical rate of substitution of land by capital will be high and in harmony
with the high value of land/capital prices' ratio (remember microeconomics).

14
Figure 17: The microeconomic argument for building skyscrapers in
the CBD and progressively shorter buildings outside the CBD

3 Suggested reading

3.1 Core literature

• McCann Philip, Modern Urban and Regional Economics, 2e. Oxford Uni-
versity Press, 2013. Chapter 4.

• Hoover Edgar M., Giarratani F. An Introduction to Regional Economics,

Online edition, http://www.rri.wvu.edu/WebBook/Giarratani/contents.htm

• O'Sullivan Arthur. Urban Economics, 8e. McGraw-Gill, 2012. Chapter 6.

3.2 Additional literature
• Ðåãèîíàëüíàÿ ýêîíîìèêà: êîíñïåêò ëåêöèé / Ïîä ðåä. Â.È. Ãðèøèíà.
Ì.: ÐÝÓ èì. Ã.Â. Ïëåõàíîâà, 2010.
• À. Î'Ñàëëèâàí. Ýêîíîìèêà ãîðîäà. - Ì.: Èíôðà-Ì, 2002.
• Ñåëèùåâà Ò.À. Ðåãèîíàëüíàÿ ýêîíîìèêà.  Ì.: ÑÏáÃÈÝÓ, 2012.

• Ôåòèñîâ Ã.Ã., Îðåøèí Â.Ï. Ðåãèîíàëüíàÿ ýêîíîìèêà è óïðàâëåíèå.

Ì: Èíôðà-Ì, 2010.
• Àíäðååâ À.Â. Ðåãèîíàëüíàÿ ýêîíîìèêà äëÿ áàêàëàâðîâ è ñïåöèàëèñòîâ:
ó÷åáíîå ïîñîáèå.  Ì.: ÊÍÎÐÓÑ, 2012.

15