Market Area Theory

Market area theory: firm’s market area is defined as the area over which the firm can under price its competitors. The firm’s net price is the sum of the price changed by the store and travel costs. Price with a monopolist: (graph). Profit maximizing is the quantity at which marginal revenue equals marginal cost. Entry and competition: Firm entry decreases sales volume and profit per firm because when firms entry the demand curve shit left. The equilibrium occurs when two conditions are satisfied. 1st, every firm max its profit, produce the output when MR=MC. 2nd, economic profit is zero: the store price= average total cost of production. Efficiency tradeoffs: average production cost increases but average travel cost decreases because increasing in the firms can decrease the production per firm. Determinants of market area: every firm has an area to minimum the cost by consumer. (Graph). Change in the demand and population density: the population in one area is increasing when produce the same amount product by small market area. Each firm needs smaller market area to exploit its scale economies. Market area and income: m=q/ (d*e).common output per firm: so city with larger demand per square mile (d*e) will have smaller market area because a larger demand per square mile means a firm needs a smaller territory to exploit its scale economies. Demise of small stores: Huckster and Haggler skills are not easily transferred to low skilled employers. The replacement of small general stores with larger store suggests that optimum store size increased. This situation occurred because innovation in urban transit caused increase in speed and decrease for travel cost. 2nd, rapid urbanization increased population density, decreasing average travel distance. As travel cost decreased, merchants expanded to exploit scale economies in marketing.

Central place theory: the simple central place model generates hierarchical system of cities. There are 3 types of cities: L large order, M medium order, S small order. The larger the city, the greater the variety of goods sold. Each city imports goods from high order city and exports to small order cities. 1st, diversity and scale economies regions cities differ in size and scope. 2nd, large means few, since there are few stores selling the goods subject to relatively large scale economies, few cities can be large. 3rd, shopping paths, which means people shopping in large cities. Relaxing the assumptions: e.g. if there is a store with less people to consume there, and we replace this store to another store, even consumers want to compare, but we will still have clusters rather than dispersing. Cluster of the new store will go in center, so there would now only be L city for more different stuffs, but S city for only little stuff. Simple mode also assumes no complimentary goods: e.g. shopping mall is a better idea that, people can consume more goods in a place instead of going lots of different shops.