In a market economy, most of the urban land can be freely sold or purchased. Thus, land economics is concerned about how the price of urban land is established and how this price will influence the nature, pattern, and distribution of land uses. The above figure provides some basic relationships between the quantity of land and its price and assumes that there is a free land market. This market mechanism follows the standard relationship between supply and demand where an equilibrium price is reached; a quantity of land Q1 would be available at a price of P1. However, what is particular to cities is that the supply of land at any given location is fixed:
- The central area of a city (central business district) is assumed by the location of the highest land price, but the lowest land availability.
- Land available in a quantity Q1 will be priced at P1.
- Moving towards the downtown the demand rises, the land becomes scarcer (Q2) and its price goes up (P2).
- Moving towards the periphery, more land is available, demand drops (Q3), and so does the price (P3).
Not every type of activity is willing to pay a price P1. Some activities may even need a price lower than P3. High land values incite a more intensive usage of space so that more activities can benefit from a central location. The logic behind the construction of skyscrapers is therefore obvious and takes place at locations with potentially high levels of competition for land. Different type of activities, each having their own land use, are willing to pay different rents.