Urban economics is rooted in the location theories of von Thünen, Alonso, Christaller, and Losch that began the process of spatial economic analysis.Economics is the study of the allocation of scarce resources, and as all economic phenomena take place within a geographical space, urban economics focuses of the allocation of resources across space in relation to urban areas. Other branches of economics ignore the spatial aspects of decision making but urban economics focuses not only on the location decisions of firms, but also of cities themselves as cities themselves represent centers of economic activity. Many spatial economic tropics can be analyzed within either an urban or regional economics framework as some economic phenomena primarily affect localized urban areas while others are felt over much larger regional areas
Arthur O’Sullivan believes urban economics is divided into six related themes: market forces in the development of cities, land use within cities, urban transportation, urban problems and public policy, housing and public policy, and local government expenditures and taxes.Market forces in the development of cities relates to how the location decision of firms and households causes the development of cities. The nature and behavior of markets depends somewhat on their locations therefore market performance partly depends on geography. If a firm locates in a geographically isolated region, their market performance will be different than a firm located in a concentrated region. The location decisions of both firms and households create cities that differ in size and economic structure. When industries cluster, like in the Silicon Valley in California, they create urban areas with dominant firms and distinct economies. By looking at location decisions of firms and households, the urban economist is able to address why cities develop where they do, why some cities are large and others small, what causes economic growth and decline, and how local governments affect urban growth.
Because urban economics is concerned with asking questions about the nature and workings of the economy of a city, models and techniques developed within the field are primarily designed to analyze phenomena that are confined within the limits of a single city.Looking at land use within metropolitan areas, the urban economist seeks to analyze the spatial organization of activities within cities. In attempts to explain observed patterns of land use, the urban economist examines the intra-city location choices of firms and households. Considering the spatial organization of activities within cities, urban economics addresses questions in terms of what determines the price of land and why those prices vary across space, the economic forces that caused the spread of employment from the central core of cities outward, identifying land-use controls, such as zoning, and interpreting how such controls affect the urban economy.