Industrial Location Theories

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Industrial Location Theories
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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

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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.
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2. Locational Interdependence TheoryHarold
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

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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 others 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.
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3. Profit-MaximizationAugust 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

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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.

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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

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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 Penaltytwo short hauls cost more that
  one long one
• Tapering Principleactual 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 Deliverydelivery of products that
  are highly perishable.