Villages, towns and cities are distinguished from each other based on several factors. In economic and administrative terms, the distinction between rural and urban settlements is usually made on the basis of two major factors: population density and the proportion of agriculture related economic activities.

Villages are distinguished from towns and cities by the larger share of agricultural activities in their economic profile. A significant proportion of the village population is engaged in agriculture linked occupations, much of what is produced there is agricultural products, and most of its income comes from agriculture. Although villages are smaller in terms of absolute numbers of people, they are spread out over a relatively larger area, resulting in lower population density.

Towns and cities have a much higher density of population than villages. The distinction between a town and city is much more a matter of administrative definition. A town and city are basically the same sort of settlement, differentiated by size. An 'urban agglomeration' refers to a city along with its surrounding suburban areas and satellite settlements. A 'metropolitan area' includes more than one city, or a continuous urban settlement many times the size of a single city.

From a sociological point of view, villages emerged as part of major changes in social structure brought about by the transition from nomadic ways of life to a more settled form of life. The development of sedentary forms of agriculture created the possibility of producing a surplus, leading to wealth accumulation, social differences, and the need for occupational specialisation.