Weber's least cost industrial location model

Least Cost Theory

A theory that industries locate where production costs are minimized

Three main cost factors

Transportation, labor, and agglomeration

Transportation costs

Costs of moving raw materials and finished products

Weight-loosing industry

Industry where final product weighs less than raw materials (ex: steel)

Weight-gaining industry

Industry where final product weighs more than raw materials (ex: soda)

Agglomeration

Benefits when companies cluster together

Agglomeration economies

Cost savings from being near other businesses

What are examples of agglomeration economies?

1. Shared infrastructure - Companies can share roads, internet, transport, and utilities which lowers costs

2. Skilled labor pool - Businesses have access to many trained workers in one area

3. Increased efficiency - Businesses become more productive due to cooperation and competition

Labor costs

Wages paid to workers that influence location decisions

Labor substitution

When a company moves to a cheaper labor location even if transport costs increase slightly

Example of bulk-reducing industry

Lumber processing

Example of bulk-gaining industry

Bottling soft drinks

Goal of Weber's model

Minimize total production costs

Where should production be located according to Weber?

Where labour and transportation costs are minimized.

+ Economic benefits of agglomeration are maximized.

What is some criticism against Weber's model?

1. Oversimplifies the factors that influence location of production.

What does Webers model fail to consider?

1. Government policies.

2. Climate effect.

3. Cultural preferences

Material index

Ratio of raw material weight to finished product weight