Weber’s Least Cost Theory

Who? Alfred Weber ( ) German Economic Geographer Published Theory of Location of Industries in “What is the best (most profitable) location for manufacturing plants?” “Just because I’m old doesn’t mean I don’t know what I’m talking about!”

Least Cost Theory Alfred Weber ( ) formulated a theory of industrial location in which an industry is located where it can minimize its costs, and therefore maximize its profits. Weber’s least cost theory accounted for the location of a manufacturing plant in terms of the owner’s desire to minimize three categories of cost: Transportation, Labor and Agglomeration

3 major factors that determine location of manufacturing 1. Transportation (most important) – Raw materials (inputs) to factory – Finished goods (outputs) to market – Distance and weight most important factors. 2. Labor – High labor costs reduce profit – May locate farther from inputs/ market if cheap labor can make up for added transport costs. 3. Agglomeration – Similar businesses cluster in the same area. – Businesses support each other, reduce costs

Transportation Transportation: the site chosen must entail (ensure) the lowest possible cost of: – A) moving raw materials to the factory, and – B) finished products from site to the market This, according to Weber, is the most important aspect.

Bulk Reducing Industry “Material Orientation” Inputs weight more that final product. Weight is lost during the production process Cost of shipping inputs to factory > cost of shipping outputs to market. Therefore, factory is located near raw materials/ inputs. Examples: copper, steel, lumber

Bulk Gaining Industry “Market Orientation” Finished product weighs more than the inputs. Weight is gained during the production process. Cost of shipping outputs to market > cost of shipping inputs to factory. Therefore, factory is located near the market. Examples: Automobiles, beverages

Input Factory Market Heavier input, shorter distance to plant Lighter output, longer distance to market, lo Lighter input, longer distance to plant. Heavier output, shorter distance to market Bulk Reducing Bulk Gaining

Labor Labor: higher labor costs reduce profits, so a factory might do better farther from raw materials and marketplace if cheap labor is available. (e.g. China – today for factory labor)

Agglomeration Agglomeration: when a large number of enterprises cluster (agglomerate) in the same area (e.g. city), they can provide assistance to each other through shared talents, services, and facilities. (e.g.-manufacturing plants need office furniture, accounting)