Everyday Economics – Why are consumer prices generally higher in urban areas than in rural areas?

In condensed urban areas there are many (potential) consumers and many firms operating to produce and sell to these consumers. The retail industry could be seen as operating between perfect competition and monopolistic competition, most retail establishments (including corner shops and the larger chains who sell branded goods; not including own brands) sell homogeneous goods and don’t usually have monopolies (however shop locations can be seen as effective local monopolies, as areas may be restricted as to the number of shops they can have). Therefore we would expect strong competition in this market and hence the driving down of prices for consumers. The reason for this is that if a Shop A was more expensive than Shop B, then consumers would shop at Shop B, and either Shop A would go out of business, or would be forced to reduce prices.

However it is generally the case that consumer prices are lower in rural areas than in the high density urban areas. Why is this?

The primary reason is that incomes in rural areas are lower than in urban areas. Hence rural consumers can’t pay the same prices as urban consumers. Without lower prices demand in these areas would dramatically fall, in order to combat this firms have to reduce their prices in these areas to maintain sales. Furthermore there are reduced costs (despite higher transport costs to deliver stock in remote areas) in rural areas meaning firms can reduce prices and still make a profit. Profit margins may even be as high in rural areas as they are in urban areas due to differing costs. Costs which are cheaper in rural area include land (there is little demand for housing and other uses for land, thus leading to lower land prices) and employment costs (there are few employment opportunities and so workers are willing to provide labour for a lower wage). Low wages in these areas can be seen as a reason for low incomes and thus the need for low prices.

Another way to look at this is that price elasticity of demand is strongly elastic. A rise in prices would lead to a substantially higher fall in quantity demanded for the good in question. Therefore firms would be unable to increase total revenue by raising prices (which they may well be able to do in some urban areas like London) but may be able to increase TR by reducing prices.

A secondary reason, which may be less important, for low prices is that the opportunity cost of shopping around is lower in rural areas than in urban areas. Demography varies between urban and rural areas, in rural areas the population is likely to have a higher median age, and people are also likely to have more time on their hands (with fewer leisure activities and opportunities for work). The opportunity cost of visiting shops is low because there are fewer things for them to be doing (this isn’t saying that there is nothing to do, and that there is no opportunity cost, just that time is scarcer in urban areas than rural) Therefore they have more time to visit different shops in order to reduce their shopping bill and hence firms have to compete on prices in order to receive custom. Comparatively, in urban areas there are a lot more leisure activities for people to pursue and time is seen as scarcer, thus the opportunity cost is greater and people may only visit one shop and pay the stated price, even if it is cheaper to purchase the good from down the road (because these consumers value their time more, they would rather pay an extra £X than walk down the road to the cheaper shop).

To conclude, the reason why prices are generally cheaper in rural areas (but this isn’t always the case, prices may be higher in tourist locations in rural areas, and prices may be high for certain goods) than urban areas if because a.) Incomes are lower in rural regions so consumers can’t afford to pay high prices b.) Costs for firms are lower in rural areas, meaning they can afford to lower prices c.) The opportunity cost of time is greater in urban areas compared with rural areas.

If you think of any further ideas please leave a comment below.

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