The bid rent theory is a geographical economic theory

Economic geography

Economic geography is the study of the location, distribution and spatial organization of economic activities across the world. The subject matter investigated is strongly influenced by the researcher's methodological approach. Neoclassical location theorists, following in the tradition of Alfred...

 that refers to how the price and demand for real estate

Real estate

In general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...

 changes as the distance from the Central Business District

Central business district

A central business district is the commercial and often geographic heart of a city. In North America this part of a city is commonly referred to as "downtown" or "city center"...

 (CBD) increases. It states that different land users will compete with one another for land close to the city centre. This is based upon the idea that retail

Retail

Retail consists of the sale of physical goods or merchandise from a fixed location, such as a department store, boutique or kiosk, or by mail, in small or individual lots for direct consumption by the purchaser. Retailing may include subordinated services, such as delivery. Purchasers may be...

 establishments wish to maximise their profitability

Profit (economics)

In economics, the term profit has two related but distinct meanings. Normal profit represents the total opportunity costs of a venture to an entrepreneur or investor, whilst economic profit In economics, the term profit has two related but distinct meanings. Normal profit represents the total...

, so they are much more willing to pay more money for land close to the CBD and less for land further away from this area. This theory is based upon the reasoning that the more accessible an area (i.e., the greater the concentration of customers), the more profitable.

Explanation

Land users all compete for the most accessible land within the CBD. The amount they are willing to pay is called "bid rent". The result is a pattern of concentric

Concentric

Concentric objects share the same center, axis or origin with one inside the other. Circles, tubes, cylindrical shafts, disks, and spheres may be concentric to one another...

 rings of land use, creating the Concentric zone model

Concentric zone model

The Concentric zone model also known as the Burgess model is one of the earliest theoretical models to explain urban social structures. It was created by sociologist Ernest Burgess in 1924. -The model:...

.

It could be assumed that, according to this theory, the poorest houses and buildings will be on the very outskirts of the city, as that is the only place that they can afford to occupy. However, in modern times this is rarely the case, as many people prefer to trade off the accessibility of being close to the CBD, and move to the edges of the settlement, where it is possible to buy more land for the same amount of money (as Bid Rent states). Likewise, lower income housing trades off greater living space for greater accessibility to employment. For this reason low income housing in many North American cities, for example, is often found in the inner city, and high income housing is at the edges of the settlement.

Agricultural analogy

Though later used in the context of urban analysis, though not yet using this term, the bid rent theory was first developed in an agricultural context. One of the first theoreticians of bid rent effects was probably David Ricardo

David Ricardo

David Ricardo was an English political economist, often credited with systematising economics, and was one of the most influential of the classical economists, along with Thomas Malthus, Adam Smith, and John Stuart Mill. He was also a member of Parliament, businessman, financier and speculator,...

, according to whom the rent on the most productive land is based on its advantage over the least productive, the competition among farmers insuring that the full advantage go the landlords in the form of rent. Later, this theory was developed by J. H. von Thünen who combined it with the notion of transport costs. His model implies that rent at any location is equal to the value of its product minus production costs and transport costs. Admitting that transportation costs are constant for all activities, this will lead to a situation where activities with the highest production costs are located near to the market place. Those with low production costs will be farther away.

The concentric land-use structure thus generated closely resembles the urban model described above: CBD - high residential - low residential. This model, introduced by William Alonso

William Alonso

William Alonso was an Argentinian-born American planner and economist.He was born in Buenos Aires and began his career with a bachelor's degree in architectural science from Harvard University in 1954. He also received a master's degree in city planning from Harvard University's Graduate School of...

, was inspired by von Thünen's model.

Bid rent theory in the Central Business District (CBD)

Central business district

A central business district is the commercial and often geographic heart of a city. In North America this part of a city is commonly referred to as "downtown" or "city center"...

Land users, whether they be retail

Retailing

Retail consists of the sale of physical goods or merchandise from a fixed location, such as a department store, boutique or kiosk, or by mail, in small or individual lots for direct consumption by the purchaser. Retailing may include subordinated services, such as delivery. Purchasers may be...

; office

Office

An office is generally a room or other area in which people work, but may also denote a position within an organization with specific duties attached to it ; the latter is in fact an earlier usage, office as place originally referring to the location of one's duty. When used as an adjective, the...

; or residential

Residential area

A residential area is a land use in which housing predominates, as opposed to industrial and commercial areas.Housing may vary significantly between, and through, residential areas. These include single family housing, multi-family residential, or mobile homes. Zoning for residential use may permit...

, all compete for the most accessible land within the CBD. The amount they are willing to pay is called bid rent. This can generally be shown in a ‘bid rent curve’.
Based upon the reasoning that the more accessible the land, generally in the centre, is the more expensive land.

Commerce

Commerce

While business refers to the value-creating activities of an organization for profit, commerce means the whole system of an economy that constitutes an environment for business. The system includes legal, economic, political, social, cultural, and technological systems that are in operation in any...

 (in particular large department stores/chain stores) is willing to pay the greatest rent

Renting

Renting is an agreement where a payment is made for the temporary use of a good, service or property owned by another. A gross lease is when the tenant pays a flat rental amount and the landlord pays for all property charges regularly incurred by the ownership from landowners...

 to be located in the inner core. The inner core is very valuable for them because it is traditionally the most accessible location for a large population. This large population is essential for department stores, which require a considerable turnover. As a result, they are willing and able to pay a very high land rent value. They maximise the potential of their site by building many stories.

As one goes farther from the inner core, the amount commerce is willing to pay declines rapidly.

Industry

Industry

Industry refers to the production of an economic good or service within an economy.-Industrial sectors:There are four key industrial economic sectors: the primary sector, largely raw material extraction industries such as mining and farming; the secondary sector, involving refining, construction,...

, however, is willing to pay to be in the outer core. There is more land available for their factories

Factory

A factory or manufacturing plant is an industrial building where laborers manufacture goods or supervise machines processing one product into another. Most modern factories have large warehouses or warehouse-like facilities that contain heavy equipment used for assembly line production...

, but they still have many of the benefits of the inner core, such as a market place and good communications.

As one goes farther out, the land becomes less attractive to industry because of the reducing communication links and a decreasing market place. Because householders does not rely heavily on these and can now afford the reduced costs (when compared with the inner and outer core),they can purchase land. The further from the inner core and, the cheaper the land. This is why inner city areas are very densely populated (terraces

Terraced house

In architecture and city planning, a terrace house, terrace, row house, linked house or townhouse is a style of medium-density housing that originated in Great Britain in the late 17th century, where a row of identical or mirror-image houses share side walls...

, flats

Apartment

An apartment or flat is a self-contained housing unit that occupies only part of a building...

 and high rises

Tower block

A tower block, high-rise, apartment tower, office tower, apartment block, or block of flats, is a tall building or structure used as a residential and/or office building...

), whilst the suburbs and rural areas are sparsely populated (semi and detached houses with gardens).

Sources

• Location and land use, 1964, by William Alonso
  William Alonso
  William Alonso was an Argentinian-born American planner and economist.He was born in Buenos Aires and began his career with a bachelor's degree in architectural science from Harvard University in 1954. He also received a master's degree in city planning from Harvard University's Graduate School of...
  
  .
• "Essential AS Geography", 2000 By Simon Ross, John Morgan and Richard Heelas