URBAN-ECONOMICS THEORIES

URBAN ECONOMICS & SOCIOLOGY

RAZIA AKHTAR| MASTERS IN URBAN PLANNING| SEMESTER 1
SCHOLAR NO. 222109108
THEORY 1 : KEYNESIAN ECONOMICS
• Developed by the British economist John Maynard Keynes during the Great
Depression of the 1930s.

• A macroeconomic economic theory of total spending in the economy and its effects
on output, employment, and inflation. GOVERNMENT
EXPENDITURE
• It is considered a "demand-side" theory that focuses on changes in the economy over
the short run.
INCREASES
• Keynes explained that the Wages and prices are not as flexible as classical TAXES DEMAND IN
MARKET
economists assumed, in fact, nominal wages tend toward the downward direction.

• The central issue underlying Keynesian thought was that those who have incomes
demand goods and services and, in turn, help to create jobs. The government by
increasing spending can increase aggregate demand.

• It believe consumer demand is the primary driving force in an economy. Hence, the
theory supports the expansionary fiscal policy. Its main tools are government
spending on infrastructure, unemployment benefits, and education. A drawback is
that overdoing Keynesian policies increases inflation.
Inference:
 Keynesian economics focuses on using active government policy to manage aggregate demand
in order to address or prevent economic recessions.
 Keynes developed his theories in response to the Great Depression, and was highly critical of
previous economic theories, which he referred to as “classical economics”.
 Activist fiscal and monetary policy are the primary tools recommended by Keynesian
economists to manage the economy and fight unemployment.
THEORY 2 : MONETARISM
• The birth of monetarism took place in the 1960s and its original proponent was Milton
Friedman.

• It is an economic concept, which contends that changes in money supply are the most
significant determinants of the rate of economic growth and the behavior of the business
cycle.

• The monetarists argued that while it is not possible to have full employment of the labor
force all the time, it is better to leave the economy to market forces.

• Monetarism advocates that neither monetary nor fiscal policy should be used in an attempt
to stabilize the economy, and that the money supply should be allowed to grow at a constant
rate.

• According to monetarist theory, if a nation's supply of money increases, economic activity

will increase; the reverse is also true. Monetarist theory is governed by a simple formula,
MV = PQ.. Assuming constant V, when M is increased, either P, Q, or both P and Q rise.

Inference:
 According to monetarist theory, money supply is the most important determinant of the rate of
economic growth.
 It is governed by the MV = PQ formula, in which M = Money supply, V = Velocity of money, P
= Price of goods, and Q = Quantity of goods and services.
 The federal reserve controls money in the United States and uses three main levers—reserve
ratio, discount rate, and open market operations—to increase or decrease money supply in the
economy.
THEORY 3 : BID RENT THEORY
• It was made in 1960s by William Alonso.

• It explains how land rent changes with increasing distance

from CBD.

• The amount they are willing to pay is called bid rent. This can
be shown in a "bid rent curve", based on the reasoning that the
most accessible land, generally in the centre, is the most
expensive land.

• Industry is, however, willing to pay to be on the outskirts of the

CBD so that they could have more land available for their
factories, but still have benefits of the CBD.

• This bid-rent theory explains one pattern of urban land-use that

is also identified by Burgess' concentric ring model.

Figure Relationship between distance and rent values from the CBD taken originally from Von Thunen’s agricultural analogy and Burgess’ Concentric Zone model
of distribution of land uses. The new proposition is to consider distance in the street network in its three forms: metric, topological and angular (geometric).
THEORY 4 : ENDOGENOUS GROWTH THEORY
• It was first created due to deficiencies and Assumptions in the Endogenous Growth Theory
dissatisfaction with the idea that exogenous  Economists who believe in the theory
factors determined long-term economic emphasize the need for the government to
growth. provide incentives and subsidies for businesses
in the private sector. It motivates businesses to
• Endogenous growth economists believe that invest in research and development so they can
improvements in productivity can be tied continue to drive innovation.
directly to faster innovation and more  There are increasing returns to scale by
investments in human capital investing in human capital through education
or training programs. Doing so can improve
the quality of labor, which increases
Examples of Endogenous Growth Models: productivity.
 The government should enact policies that
1. Arrow Model help entrepreneurs, which creates new
businesses and new jobs.
2. Uzawa–Lucas Model  Investments should also be made to improve
infrastructure and manufacturing processes in
3. Romer Model order to achieve innovation in production.
 Intellectual property rights, such as copyrights
and patents, are incentives for businesses to
Inference: expand their operations.
• Endogenous growth theory maintains that economic growth is primarily the result of internal forces,
rather than external ones.
• It argues that improvements in productivity can be tied directly to faster innovation and more
investments in human capital from governments and private sector institutions.
• This view contrasts with neoclassical economics.
REFERENCES:
1. Economic Theories - benefits (referenceforbusiness.com)

2. Alonso, William. 1964. Location and land use. Cambridge: Harvard University Press

3. The Bid-Rent Theory AP Human Geo. by Joshua Tosa (prezi.com)

4. https://corporatefinanceinstitute.com/resources/knowledge/economics/endogenous-growth-theory/