Bid Rent Theory

Buenaflor, Allen Patrick

The theory
• The bid rent theory is a geographical
economic theory that refers to how the price
and demand for real estate change as the
distance from the central business district
increases.
• It states that different land users will compete
with one another for land close to the city
center.
The theory
• This is based upon the idea that retail
establishments wish to maximize their
profitability, so they are much more willing to
pay more 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.
 Alonso’s 3 points stressing
characterization of Bid Price Curve
• Every individual or household has her own bid
price curve. Others have other curves
• Every bid price curve represents a given utility
level. There is family of bid price curves
representing different utility levels, analogous to
the wellknown indifference curves
• Prices represented by the bid price curve have no
necessary relations to actual prices: "A bid price
is hypothetical, merely saying that, if the price of
land were such, the individual would be satisfied
to a given degree."
The model
• px + rh = y0 + w(1-t-T)

• Let U(x,h,T) be the utility function of a

household where h is the amount of housing
space used, T is the amount of leisure time
and x is the consumption of other goods and
services. Where t is the commuting time, w
the wage rate, y0 the nonwage income. Given
t, r and p the household maximizes utility.