Location decisions. Bid rent theory and monocentric city models.

To understand the reasons that drive location decisions, we first need to understand the reasons that make people and firms pay more for some locations then for others.

The transport costs have influence on firms location decisions. Firms tent to locate themselves where they can minimize these costs. A firm prefer to be located close to the consumer, when the price of the transport of the manufacturing materials is lower then their distribution price, and close to the manufacturing materials if those transport costs are higher then their distribution costs.

In an urban area accessibility is very important. More than land's fertility. Properties are more expensive where transport costs are low, and became cheaper as the transport price increases.

Lisbon's Central Business District - Portugal

Advantages of agglomeration economies and economies of scale, some firms or manufactures prefer to cluster together.

Restaurants, museums tent to cluster in city centers where they can have access to more customers.

These agglomeration economies are so important that it becomes more cost-effective for firms to build taller buildings than it is for them to locate further away from the Central Business District (CBD).

Bid rent theory makes a relation on how prices of properties change, as the distance from CBD changes.

The monocentric city model is based on the bid rent theory, suggesting the prices of properties decrease as we move way from the CBD.