Im planning on replaying FF1 for the PSX, but I have a little problem with the equipment. What I want to know is; is it worth fighting and hence getting more levels around the Elf Kingdom just to get enough cash to buy the equipment there?
Also what are some cities' equipment shops should I aim for for better equipment than others?

I've only played the NES version so I don't know how much it changed. but yes you should level, and not just for the gold. That area is the most crucial part to level up in the NES version where you have to go from 3-4 to at least 7 or you have no chance in the marsh cave. The equipment isn't really necessary in the next dungeon. White magic is what will get you through.

Whoops - that is if you ever return to this...

It will help you out a great deal if you fight long enough to get the silver swords, and they will be your best weapons for a while, actually. It's up to you, but this is as good a time as any to train your characters.