Industrial Location Theories

1. Least-Cost Theory Alfred Weber Explains the optimum location of industrial facilities using the locational triangle Triangle illustrates the least-transport-cost location Transportation is the key element

Solving Weber's location model often implies three stages; finding the least transport cost location and adjusting this location to consider labor costs and agglomeration economies. Transportation is the most important element of the model since other factors are considered to only have an adjustment effect. To solve this problem, Weber uses the location triangle within which the optimal is always located.

2. Locational Interdependence Theory Harold Hotelling Locations are most influenced by locations chosen by its competitors Competitive firms with identical cost structures arrange themselves to assure a measure of spatial monopoly in their combined market Major emphasis is on revenue rather than cost

In panel (a), the linear market, l, is segmented into two protected or uncontested parts, a and b, and one contested part, x + y, that is shared equally by the sellers. The two sellers, A and B, can move to any location on the line that will maximize their profit, and they do so believing that the rival will not change its location in response to their competitive action. If each seller believed that the other’s location was fixed, the first seller to act, say A, would move to a position adjacent to its rival, ensuring itself the largest possible market area. If the initial positions are as depicted in panel (a), the first seller to move would seek to eliminate the contested portion of the market and maximize its protected portion. Thus panel (b) would represent such a move.

3. Profit-Maximization August Losch The correct location of a firm lies where the net profit is greatest. The production location will be where the difference between production costs and sales income is the greatest. Effected by –Substitution Principle –Spatial Margin of Profitability –Satisfying Locations

4. Agglomeration Economies Savings an individual enterprise derived from locational association with a cluster of other similar economic activities… Multiplier Effect: The cumulative processes by which a given change sets in motion a sequence of further industrial employment and infrastructure growth.

5. Comparative Advantage The principle that an area produces the items for which it has the greatest ratio of disadvantage in comparison to other areas, assuming free trade exists. Outsourcing: Producing parts or products abroad for domestic sale

Transportation Terms Line Haul Costs (Variable Costs)—the costs involved in the actual physical movement of goods. Terminal Costs (Fixed Costs)—the costs incurred, and charged, for loading and unloading freight at origin and destination points unrelated to distance. Short Haul Penalty—two short hauls cost more that one long one Tapering Principle—actual costs of transport, including terminal charges and line costs, increase at a decreasing rate as fixed costs are spread over longer hauls. Just in Time Delivery—delivery of products that are highly perishable.