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Rectangular Land Market Notes(1)(1)

Rectangular Land Market Notes(1)(1) - Introductory Notes on...

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Introductory Notes on Rectangular Land Market Model May, 2010 These notes elaborate on a land-market model presented in O’Sullivan’s textbook “Urban Economics”. Building on the textbook’s analysis, our focus will be on these key questions: What is the impact on land rents if an endogenous output price replaces the textbook’s exogenous output price? 1 What is the impact on land rents and output price if the land supply is expanded or contracted? The rectangular model is introduced in the section “Bid-Rent Curves for the Manufacturing Sector” (pages 122-124, 7 th edition, or 102-104, 6 th edition). In that section’s Figure 6-1, we see an equilibrium bid rent curve (= bid rent function, abbreviated here as BRF). The BRF shows zero-economic-profit land rents for manufacturing firms as a function of distance (x) from a highway. The zero-economic-profit condition is met when firms earn only the profit required to stay in business. The textbook discussion continues in “A General Equilibrium Model of a Monocentric City” (pages 192-194, 7 th edition, or 157-160, 6 th edition). In Figure 7A-3 we again see an equilibrium BRF for manufacturing firms – now labelled R b. (the b being for businesses that manufacture a product). Figure 7A-3 includes residential land as well as manufacturing and agricultural land, but the discussion in these introductory notes will be limited to manufacturing and agriculture. Thus Figure 7A-3’s bid rent functions labelled R r (initial) , R r (streetcar) can be disregarded for now. They are considered, along with the upper-right (labour market) diagram, in separate notes entitled “The General Equilibrium Rectangular City Model”. 2 In the lower part of Figure 7A-3 we see the manufacturing land area (marked D), with its western boundary formed by a highway 3 1 An e ndogenous is determined in the model; an exogenous price is given from outside the model. 2 A land market could function without residential land if firms provide their employees with living accommodation at the job site. 3 As illustrated in Figure 7A-3, this western boundary is labelled the “centre”, but we will assume here it is a north-south highway as in Figure 6-1. The lower part of Figure 7A-3 shows a land- market map (the land market as viewed from above). As has been noted, the area marked D (demand for labour) is land occupied by manufacturing firms – firms that generate demand for labour. The area S (supply of labour) is land occupied by housing firms (firms housing residents
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