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The town is located on the island of Ærø, which lies in the Baltic Sea between Denmark and Germany. The town has a population of 1,851 (1 January 2014). It covers an area of 10 km² and has a coastline with beaches to both east and west. To the north-east it is connected by road to Svendborg via ferry service from Fynshav; there are also ferries from Marstal on Ærøskøbing's eastern coast. Ærøskøbing was founded in 1288 when King Erik Klipping ceded land for its construction as part of his effort to develop trade along this stretch of coast where he had established several towns: Vordingborg, Nykobing Mors (Mors), Nakskov (Nakkehoved) og Rårup(Rårup).