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Bid Rent Theory

The bid-rent theory states that the price of land decreases as distance from the central business district (CBD) increases, due to higher transportation costs. According to the theory, businesses are willing to pay more to locate closer to the CBD for ease of access, while industries require more affordable land further out. Residential areas develop even farther from the CBD, where land is cheapest. The spatial distribution predicted by the bid-rent theory is an equilibrium in which different land uses do not outbid each other for nearby locations.

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Kerwin Jay Condor
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2K views15 pages

Bid Rent Theory

The bid-rent theory states that the price of land decreases as distance from the central business district (CBD) increases, due to higher transportation costs. According to the theory, businesses are willing to pay more to locate closer to the CBD for ease of access, while industries require more affordable land further out. Residential areas develop even farther from the CBD, where land is cheapest. The spatial distribution predicted by the bid-rent theory is an equilibrium in which different land uses do not outbid each other for nearby locations.

Uploaded by

Kerwin Jay Condor
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
  • Introduction to Bid-Rent Theory: Introduces the concept of Bid-Rent Theory and its relevance to geographical economics, with an emphasis on real estate pricing models.
  • What is the Bid-Rent Theory?: Describes the foundational principles of the Bid-Rent Theory, explaining how distance from the central business district influences real estate demand.
  • Background: Discusses the historical background and theoretical underpinnings provided by Alonso and Muth, focusing on land value determinants.
  • Central Business District (CBD): Uses an example to clarify transportation costs at varying distances from the CBD, supported by visual models of bid rent functions.
  • Use Cases: Provides examples of how Bid-Rent Theory applies to manufacturing and retail, illustrating practical implications in real estate decisions.
  • The Spatial Equilibrium: Explores the concept of spatial equilibrium as it applies within the Bid-Rent framework, including land use patterns between different industry sectors.
  • The Rent Gradient: Examines the bid-rent curve's influence on land rent gradients and accessibility.
  • Assumptions & Criticisms: Identifies assumptions underlying the Bid-Rent model and critiques regarding its real-world applicability.
  • Simplified Distance Decay Model: Presents a simplified visualization of distance decay effects on land value distribution around the CBD.
  • Is the Bid-Rent Theory Still Prevalent?: Concludes with a discussion on the relevance of Bid-Rent Theory in the modern economic landscape and factors influencing current urban planning.

THE BID-RENT THEORY

What is the Bid-Rent Theory?

• It is a geographical economic
theory that refers to how the price
and demand for real estate changes
as the distance from central
business district increases(CBD).
What does the Bid-Rent Theory State?
• The Bid-Rent Theory states that the closer land is to the CBD, the more
competition there will be for the land, since businesses wish to maximize profit.
• Commerce is more likely to locate themselves in the inner core of the city
• They are willing to pay the high rent
• They need the ease of accessibility to attract a large population to the stores
• Industry tends to locate further from the CBD, since their industry needs more
land for less rent.
• However, they are still close enough to obtain the benefits of easy accessibility and
a close marketplace
• To residentials, these factors are not as important, so they tend to locate
themselves further if they can afford the cost of commute
• The poor tend to stay to be near the city to commute to their jobs easily
Background
• This theory has been drawn on concept from
microeconomics and is based on the work of
Alonso (1964) & Muth (1969). This theory focuses
on how the land use patterns are determined by
the land values. these are further dependent on
the transportation costs & accessibility.
Central Business District (CBD)
• In order to make it simpler to understand let’s
take an example. Transportation costs are low
near to the Central Business District (CBD) and
higher as we go farther. Firms located near the
CBD are willing to pay more for this centrally
located parcels of land in order to minimise their
transportation costs. Similarly, because added
transportation costs at more distant locations will
reduce profits, firms/retail will not be willing to
pay as much for land at more distant locations.
They would also be losing the accessibility to
customers as they move farther from the CBD. An
illustration on the firm bid rent function has been
depicted in Fig 1.
Manufacturing
• Now, we are going introduce another
economic activity apart from retailing, i.e.
manufacturing. For manufacturers, access
to markets and labor is important, but less
important than for retailers. Also another
determinant factor that play a major role
for manufacturers is the land holding size
as manufacturing units demand more
space in contrast to retail units. Under this
condition, the slope of the bid rent function
for manufacturing will be flatter than the
bid rent function for retailers as seen in Fig
2.
Residential
• Similarly, last but not the least let’s
introduce the location of households.
The basic concept fo them is as one
goes farther out, the land becomes
less attractive to the industry because
it doesn’t have easy access to the
marketplace and transportation. And
since houses do not depend on these
factors and land is cheaper, they can
buy land out there. (Refer Fig. 3).
The Spatial Equilibrium
• If we look upon Fig 4, it can clearly be seen
the consequences on the land use (if the
city is symmetrical which we rarely
observe) due to bid-rent theory. It also
helps us to understand some important
outcomes from the theory of urban land
use. Further, this leads to the concept is
that of spatial equilibrium. It is a condition
in which there is stability in the pattern of
land use. Stability of land use occurs when
there is no incentive for, say retailers, to
out-bid manufacturers for land beyond X1
(at least in this example). Similarly,
manufacturers have no incentive to out-bid
retailers for land between X1 and the CBD.
The Rent Gradient
• Tracing only the upper-most portions of
each bid rent function (Refer Fig 1 to Fig
3) renders the land rent gradient, as
illustrated in Fig 5.
• The rent gradient indicates the
rate at which the value of urban
land declines with distance from
the CBD. It is also worthy to note
that because land prices increase
closer to the CBD, centrally
located land will be tend to be
used more intensively. The
intensity of urban land use is
correlated with the height of
buildings. Generally taller
buildings being located on higher
valued land which is why they are
found in central business districts.
As one moves away from the CBD
both the value of land and its
intensity of use decline, as do the
height of structures.
Is the Bid-Rent Theory Still Prevalent?
• Simply put, no.
• Businesses locate themselves based on more factors
than just accessibility
• Some cities have multiple CBD’s
• Rent does not increase linearly based on distance, so
rings do no form, which is what the model shows

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