The Five Axioms of Urban Economics

The five axioms of urban economics are essential to understanding how urban economics works and how it is applied. An axiom is a self-evident truth. This means that each of these five things is something that most people can understand and accept to be true. These five axioms provide the basis for urban economics and the foundations for all future topics associated with urban economics that will be discussed.

Prices Adjust to Achieve Locational Equilibrium:

If the price were the same for two houses, one that was in Hawaii on the beautiful beach and the other located in a slum in New York City, there would be an incentive for one to move to the house in Hawaii.  A locational equilibrium occurs when there is no incentive to move.  In order to achieve this, the price of the slum house will decrease as the price of the beach house in Hawaii increases.  That way, a person who could afford either house before now has either an incentive to move to the cheaper house they can afford rather than the nice beach house which a more affluent person can now live in. 

Self-Reinforcing Effects Generate Extreme Outcomes: 

This axiom means that if one type of person moves into an area, then that area will become more attractive to more of the same types of people.  For instance, a few artists may move into a city and because of their artistic touches to the city and local night life more and more artists will move in until it is a complete artistic city that will draw even more artists to the area.  Another example of a self-reinforcing effect generating extreme outcomes is if one or two car dealerships were to locate in the same area.  People would then want to shop for cars in this area thus making it even more desirable for auto stores and car dealerships to locate here.  This would then create an extreme outcome of an auto cluster.  This can happen with almost any type of neighborhood and this is why it is common to see a lot of the same types of things or people grouped together in a city.

Externalities Cause Inefficiency: 

An external cost is one in which the full extent of an action is not paid by the person performing the action.  It will affect other people as well.  For instance, if you drive on the highway it will slow down everyone else who is also on the highway.  Also, in the case of rubbernecking, which is slowing down to see an accident on the side of the road, your curiosity will slow down everyone else on the highway.  An external benefit is one in which something that one person does creates a benefit for someone else.  This is most common in neighborhoods where one person may make improvements to their property thus helping their neighbors increase their property value because the area will suddenly become more desirable.  When there are costs and benefits in society the market is not socially efficient.  To learn more about this, go to our page on externalities.

Production is Subject to Economies of Scale:

In order to achieve economies of scale the average cost of production has to decrease as output increases.  The two things that contribute to economies of scale are indivisible inputs and factor specialization.  These are important here because inputs can be spread farther as output increases and people can work in more specialized areas thus allowing them to become more efficient at what they do.

Competition Generates Zero Economic Profit:

This states that firms will continue entering the market in the same location until economic profit becomes zero.  Once this is reached, a firm will be making enough money to continue their business, however there will not be an incentive for new firms to continue entering the market.

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