Locational Theorists

Location Theory

Predicting where business will or should be located, considering variable costs and friction of distance

Variable costs

Other costs that impact the end profit of a product (energy supply, transport, expenses, labor costs, etc)

Friction of distance

increase of time and cost that usually comes with increasing distance

Weber’s Model (AKA Least Cost Theory)

Manufacturing plants will locate where costs of transportation, labor, and agglomeration are the least, therefore maximizing its profits.

Transportation

The site chosen must entail the lowest possible cost of moving raw materials to the factory and finished products to the market.

Labor

higher labor costs reduce profits, so a factory might do better further away from raw materials and markets if cheap labor is available. Ex: China today

Agglomeration

When a large number of enterprises cluster in the same area, they can provide assistance to each other through shared talents, services, and facilities. Ex: Manufacturing plants need office furniture

What is the most important category of cost?

Transportation

Weight-losing case

The weight of the final product is less than the weight of the raw material.

Weight-gaining case

the weight of the final product is heavier than the raw materials that require transport. Usually the case of a widely available material such as water.

Where would firms producing products less bulky than the raw material settle?

Near the raw material source

Where would firms producing products heavier than the raw material settle?

Near the market

Who wrote ‘Theory of Location of Industries’?

Alfred Weber

Hotelling’s Model (AKA Model of Spatial Competition)

In trying to maximize sales, competitors will seek to limit each other’s territory, and therefore will end up close to one another in the middle of their customer base. The competition adds economic gains to the area and ensures that each business will most likely improve their products. Ex: Multiple hotel chains around beaches or amusement parks

Losch’s Model (AKA Zone of Profitability Theory)

Firms choose locations where they can maximize profit by guessing where most customers will be located. Cost is below income in the zone of profitability. Other businesses opening can impact the zone.