Ch.

3 Market Areas and Systems of Cities(s-1)

>Logical Analysis
___from the market area of a firm to city settlements
___from city settlements to a hierarchical system of cities
>Location on a plain
___August Loesch(1938):modeled a world consisting of a flat,
homogeneous plain (for example: farmer/brewer trade beer with
bread)
*Price –distance function and Derivation of the Quantity-
distance function
 Ch.3 Market Areas and Systems of Cities(s-2)

>basic model: Price –distance function and

Derivation of the Quantity-
price distance function
$10

Price-distance function
Demand
$4

8 Q
Q Distance 5
Q
3 Quantity-distance function

8 Q
D
3
 Ch.3 Market Areas and Systems of Cities (s-3)

>Demand Cone
A demand cone shows the quantity that a spatial monopolist sells
to people who live at each distance from its location. The base of
the demand cone shows the maximum boundary of market area
of a firm.
Quantity

Distance(east/west)

Distance(North/south)
 Ch.3 Market Areas and Systems of Cities (s-4)

>Discussions on Demand Cone

___Market areas of spatial monopolists

Areas not served

By existing markets
Ch.3 Market Areas and Systems of Cities (s-5)

> >Discussions on Demand Cone

___Overlaping Market areas of two spatial monopolists

Z
Y
A X B
Ch.3 Market Areas and Systems of Cities (s-6)

> >Discussions on Demand Cone

___The long-run equilibrium in monopolistic competition (Hexagon---
similar to Honeycomb)

Evolution of circular market

area into hexagonal
market areas
A

Honeycomb of
Long-run equilibrium market
areas
 Ch.3 Market Areas and Systems of Cities (s-7)

>discussion on Demand Cone

___Threshold size market area (no excess profits for a spatial
monopolist, only normal profit)

price MC

$8
AC

MR Demand

Quantity
4
 Ch.3 Market Areas and Systems of Cities (s-8)

>Systems of cities and central places

____Christaller’s (1933) description of central places and
functional hierarchy of cities in south Germany .
.Order-one centres (the agriculture villages): the smallest central
place offers a different assortment of goods and services. For
instance , a bar, a post office and a church.
..Oder-two centers(towns): all goods and services that are
available in orser-one centers are also available in order-two
centers.
…The highiest-order centers( city): the entire nation is the market
area of highiest-order centers.
 Ch.3 Market Areas and Systems of Cities (s-9)

____The Hierarchical System of Cities

.ordr-one places:
the market area for convenience stores, small café’s , primary
and middle schools, and post offices.
...order-two places:
the market area for hotels and restaurants, banks, court houses,
or cameras( besides order-one).
…order-three places:
market areas for educational facilities, hospitals; business services,
and bus or train terminals( besides order-two).
….highiest-order center(Metropolitan area):
Live performing arts, fine arts,and museums,etc.
Ch.3 Market Areas and Systems of Cities (s-10)

>The Instability of Urban Hierarchies

____due to changes in transportation and communication system
____Approaches for studying Competing centers
.two problems with Christaller’s and Loesch’s methods for
determining market area boundaries:
1.Price differences affecting market boundaries
2.Differences in population, in demographics, or in the variety of
goods sold affecting market boundaries
>Fetter’s Law of market Areas
Between centers A and B, the market boundary is found where,

P A
 DA t A  P B
 DB t B
Where, P—the price of good at the center
D—the distance from the center to the market boundary
t---the transport rate per unit of distance of shopping the
good from the center.
Ch.3 Market Areas and Systems of Cities (s-11)

>Reilly’s Law of Retail Gravitation

The Law depends on empirical observation.
Two competing centers will attract consumers from a third location:
1)In direct proportion to their respective sizes
2)In inverse proportion to the relative distances to the residences.
Ch.3 Market Areas and Systems of Cities (s-12)

>Rural cities and Economic Growth

_____central places theory supports the hypothesis that
Economic growth and development for cities differs according to a
city’s rank within the system of cities (it’s important for a city to
reach a certain level in the hierarchy).
____the multiplier effect (the increase in spending due to the initial
spending)
.greater for larger cities than for smaller ones
..four sources:
1) consumers and businesses
2) Sold elsehere
3) Tourism
4) Government spending
Ch.3 Market Areas and Systems of Cities (s-13)

>Limitation of the Central Place Theory

___Homogeneous plains without rivers, mountains, or roads are rare;
___Buying power, tastes, and preferences are not homogenous;
___institutional obstacles( administrative or cultural frontiers);
___the theory ignore the supply channels in the system, the artificial
barriers of doing business, effect of pollution, traffic congestion, high
crime rates, etc.
Ch.3 Market Areas and Systems of Cities (s-14)

>Q&A