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

2. 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?

3. 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

4. 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

5. 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

6. 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

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

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

9. 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

10. 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

11. 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

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

13. 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

14. 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

15. 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?

16. 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?

17. 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.

18. 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

19. Fladeboes!!!!!