How do Location Theories explain Industrial Location? Key Question: How do Location Theories explain Industrial Location?

Can you predict where a factory should locate? What is the goal of any factory? Profit = Price - Costs Assuming: Labor cost the same / available anywhere There is only one market Topography is flat Transportation costs are a direct result of weight Where would you put a factory?

Location Theory Location Theory – predicting where business will or should be located. Consider: Variable costs (labor, materials, energy) Profit maximization / Size of market Friction of distance Transportation

Variable - Labor 3 major traditional considerations price, skill, and amount of workers Labor Flexibility: highly educated workers able to apply themselves to a wide variety of tasks and functions

Variable - Raw Materials Very few industries use raw materials Most manufacturing is based on the further processing and shaping of materials. GM may need parts

Variable - Power Supply (Energy) Power supplies that are immobile or of low transferability may attract activities dependent on them Current technology made less important Industries requiring large amounts of energy still situated near the power source

Market Goods are produced to supply a market demand Size, nature, and distribution or markets is important in industrial location decisions

Transportation Unifying thread of all factors of industrial location Use many different forms of transportation

How do location theories explain industrial location? Friction of distance is a key issue Increase in time and cost that usually comes with increasing distance Related to distance decay manufacturing plants will be more concerned with serving the markets of nearby places rather than distant places

How do location theories explain industrial location? Economic geographers assume that decision makers are trying to maximize advantages over competitors, that they want to make as much of a profit as possible and take into account variable costs like energy supply, transport expenses, labor costs, etc. when choosing an industrial location

Location Models Weber’s Model Hotelling’s Model Losch’s Model Manufacturing plants will locate where costs are the least (least cost theory) Theory: Least Cost Theory Costs: Transportation, Labor, Agglomeration Hotelling’s Model Location of an industry cannot be understood without reference to other industries of the same kind. Theory: Locational interdependence Losch’s Model Manufacturing plants choose locations where they can maximize profit. Theory: Zone of Profitability

Least Cost Theory – Weber (1868-1958) Transportation Labor Can cheap labor do everything? Agglomeration Advantages Disadvantages

Weber’s Model (Cost Minimization) 1. Transportation - the site chosen must have the lowest possible cost of Moving raw materials to factory and finished products to market. This is the most important factor. 2. Labor higher labor costs reduce profits, so a factory might do better farther from raw materials and markets if cheap labor is available -ex: China – today 3. Agglomeration Substantial number of enterprises cluster in the same area Can provide assistance to each other through shared talents, services & facilities Big-city locations more attractive May make up for increase in transport and labor costs ex: Oil refineries, chemical and plastic factories

Friction of Distance: Profit = Price – Costs Weber Key Ideas The greater the weight the greater the cost The greater the distance the greater the cost The greater the time the greater the cost (think veggies!) Focused on Costs : Variable Costs! Profit = Price – Costs

Hotelling’s Model (Revenue Maximization) Theory: Locational interdependence: Location of an industry cannot be understood without reference to other industries of the same kind. Decisions are not made independently but are influenced by the actions of others. Variable Revenue: Maximize Profits not minimize costs! Profit = Price – Costs Find the location that provides the best profit …and where other industries are located. Can you create a monopoly?

Losch Model (pronounced laesch) (Profit Maximization) Losch’s Model Theory of Profitability- Manufacturing plants choose locations / zone where they can maximize profit. Due to distance decay, the zone on the left and right will be deemed as unprofitable so firms will avoid the margins. Other businesses can come along and change configuration of the zone And things can change…replace labor with machines? Increase transport costs but reduce land rent?

Example of Losch’s Model Chiquita bananas based in North America gets its bananas from tropical regions They own farms in Costa Rica, Guatemala, Honduras and Panama Production cost is cheap & can be transported over large area People living in the hot, humid areas in the Caribbean and Central America get the bananas faster and cheaper than people living in other places.

Time to apply some theories… Using Weber, Hotelling, and Losch… Where would you sell doughnuts in the morning at OHS? Weber – Restaurant classroom Hotteling – School Cafeteria Losch – Door #1 and Door #11

Fladeboes!!!!!