Classical Location Theory

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Classical Location Theory

• Based on Alfred Weber, Über den Standort der
  Industrien 1909

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Minimum cost locationI vant to bite you on zee
neck!
Source The Lethbridge Herald January 27, 2003
A1
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Weberian Location Theory

• A deductive and normative theory to explain
  industrial location
• Normative theory to explain where industrial
  activity should be located
• The question of the best location is far more
  dignified than determination of the actual one
  (August Losch, The Economics of Location 1954)

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Weberian Industrial Location Theory

• The best location of production is determined by
  minimizing transportation costs, assuming fixed
  locations for
• Markets
• Raw materials
• Labour

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Raw Materials and Webers Material Index

• Ubiquitous raw materials
• Localized raw materials
• Pure
• Gross
• If MI gt 1, raw material orientation
• If MI lt 1, market orientation

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Webers Assumptions

• Perfect competition each producer supplies a
  market of unlimited size with no possibility of
  monopolistic advantages arising from the chosen
  location
• Fixed locations for raw materials, labour and
  markets
• Isotropic surface

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• One localized pure raw material
• Located at RM site
• RM procurement cost increases away from raw
  material site

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• But FP distribution cost decreases away from raw
  material site and reaches a minimum at the market
  itself.

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• With a pure raw material and a constant freight
  rate, total transportation costs are constant.
• Thus we should be indifferent about industrial
  location, costs are same everywhere.

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• One localized pure raw material plus ubiquities
• Ubiquities add to the weight of the FP
• But they are as available at the market as
  everywhere else.
• Market oriented industrial location

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Soft drinks bottling plants classic examples of
market orientation
Source F.P. Stutz and A.R. de Souza The World
Economy 3rd edition 1998 Prentice Hall
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• One localized gross raw material
• Location at RM site eliminates cost of
  transporting waste materials
• Processing of gross raw materials tends to be
  oriented to raw material locations

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Copper ore processing
Source F.P. Stutz and A.R. de Souza The World
Economy 3rd edition 1998 Prentice Hall
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Orange grove, Florida Gulf Coast
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Orange processing, Dade City FL
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In the real world

• Freight rates for finished products are higher
  than for raw materials.
• Terminal costs act as a fixed cost discouraging
  industrial location at intermediate locations.
• But intermodal transfers may require a
  break-in-bulk which may favour an intermediate
  location feasible.
• Freights are stepped by zones rather than a
  smooth function of distance

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• So this kind of Weberian analysis is only the
  beginning of a much more complex situation.
• And it assumes only one raw material is required!
• What if there is more than one input to an
  industrial process?

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Webers Varignon frame

• A mechanical solution
• Imagine a board with holes located at their
  relative locations. Tie strings together and
  thread through the holes. From each string we
  suspend weights proportional to the quantity of
  localized raw materials required for the product.
• Mathematical solutions are also possible!

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Varignon Frame
Source F.P. Stutz and A.R. de Souza The World
Economy 3rd edition 1998 Prentice Hall
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Another Varignon Frame
Source P. Dicken and P.E. Lloyd Location in
Space 3rd edition 1990 HarperRow
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The Variable Cost Model

• To expand on Webers model and avoid his
  preoccupation with transportation costs, we
  develop a new model focusing on total costs.
• Based on David Smiths Industrial Location 2nd
  ed. New York John Wiley 1981

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Imaginary data
Based on David Smiths Industrial Location 2nd
ed. New York John Wiley 1981
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Understanding the data

• Basic cost is for the required quantity to
  produce one unit of output at its cheapest
  source.
• It will cost an additional 3.33 cents per mile to
  move each of the raw material, power and labour
  inputs away from their minimum cost locations.
• Land marketing are treated as ubiquities or
  spatial constants.
• This may be shown graphically

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Imaginary surface

• A locational triangle
• A, B, C represent cheapest source for inputs,
  material, labour and power, respectively-.
• Lets add isocost lines to point B

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One supply funnel centred on B

• Basic cost at point B is 30.
• Beyond B, the locational cost includes
  transportation, increasing at a fixed rate away
  from B creating a supply funnel

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Three supply funnels

• Add isocost lines to points A and C
• Note that locational pull is the same for all
  three inputs
• These isocost lines are known as isotims, they
  rise away from points A,B,and C (note that the
  direction of slope is indicated by the
  orientation of isotim labels)

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Towards a total cost surface

• We may plot the total cost (basic cost
  locational cost) for any point.
• If we do this for every point in space, we create
  a total cost surface.
• We could then show the shape of this three
  dimensional surface with a family of isocost
  lines which are known as.

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Isodapanes I

• A line joining equal total cost locations drawn
  around the minimum total cost location
• Note that as a specific form of generic isolines,
  these isodapane labels are upside down!

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Isodapanes II

• To give a two dimensional impression of this
  three dimensional cost surface,
• we may draw a profile along line PQ
• We may then project a line downwards from each
  point of intersection between an isodapane and
  line PQ.

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We may now plot a space cost curve as a profile
of the total cost surface
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Price is spatially fixed, hence revenues are
represented as a straight line. Ma and Mb
indicate the spatial margins to profitability
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Price is spatially fixed, hence revenues are
represented as a straight line.
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Ma and Mb indicate the spatial margins to
profitability
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Point O indicates the minimum cost location!
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Adding Complexity to the Model

• Allow basic costs to vary
• Allow locational costs to vary
• A new family of isodapanes is created which
  yields,
• a new space-cost curve!

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Classical Location Theory

• Data needs are huge
• Cost, revenue and profit surface for each
  industry is complex and different
• Some industries have a flat profit topography,
  others are more rugged, and still more face
  mountain and canyon-like features.
• But classical theory pays little heed to
  strategic behaviour by multilocational firms.