Location Theory I

1
Location Theory I

• Week One

2
Three Decisions for Manufacturers

• The scale of operation
• Different scales of operation may require
  different locations to give access to markets of
  different sizes
• The technique
• Different techniques will favor different
  locations as firms tend to gravitate toward cheap
  sources of the factors that they require
• The location

3
The Factors of Production, Input Combination and
Cost Structure 1

• Relative Intensity of the Factors Used in
  Production
• Labor Intensive
• Capital Intensive
• The Choice of Combination of Factors of
  Production
• Equal Outlay Lines
• Equal Product Lines
• Scale Line (Expansion Line)

substitution
4
The Factors of Production, Input Combination and
Cost Structure 2

• The Supply of the Factors of Production
• Depends on the mobility of the factors
• Geographically immobile
• Imperfectly mobile
• Perfectly mobile
• The combination of inputs
• Varies from industry to industry
• Varies from firm to firm
• Varies from place to place

5
Cost Structure and Location

• Definition the relative cost of the required
  quantity of the various inputs needed to produce
  a given output
• Input coefficient
• Cost Structure
• Material Orientation
• Labor Orientation
• Transportation Orientation Market Orientation

6
Major Inputs Land 1

• Uses of Land
• Site for the Factory
• Storage for the input materials and the finished
  products
• Parking space for cars and trucks
• In some places, it is easier to find a suitable
  site for the factory due to availability of the
  land, regulations, and so on.

7
Major Inputs Land 2

• Different industry and technique require certain
  physical attributes of land
• Textile industry during the Industrial Revolution
• Aluminum refinery production facility in Iceland
• The Cost of Land and the Choice of Location
• Broad Trends and Local Variations
• Profile of Land Cost Variations in Metropolitan
  Areas

8
Major Inputs Capital 1

• Breakdowns of Capital
• Financial Capital Money required for acquiring
  land and other inputs
• The Fixed Capital the Physical Plant
• Financial capital availability varies from place
  to place
• Social relations and Finance in localities
• Certain activities are easier to find funds in
  some places ex IT start-up companies in
  California

9
Major Inputs Capital 2

• The Cost of Financial Capital and Location
• Empirical research shows no significant relations
• The Fixed Capital
• Due to immobility of physical plants and
  infrastructures, existing industrial location
  patterns often perpetuate industrial inertia.
• Some shocks could end industrial inertia
• Sunk Cost

10
Major Inputs Materials and Power

• Uneven geographical distribution of materials
• Different cost for acquiring materials the cost
  of extraction or production and the cost of
  transportation
• Sources of Power
• Power may become critical in near future
• Iceland Aluminum refinery in Iceland

11
Major Inputs Labor

• Distinctive Labor Requirements of Particular
  Industries
• Skilled semi-skilled unskilled deskilling
• Knowledge workers in highly specialized services
• Varying Labor Costs
• Chinese Workers Average Wage the average wage
  of an urban worker in China in 2004 was 9,422
  yuan (1,164), and a rural worker made just 2,936
  yuan (363) on average.

12
Major Inputs State and Local Taxes

• Managerial City vs. Entrepreneurial City
• Various governments levied taxes on firms
• Increasingly local governments are offering tax
  exemption to firms in order to attract investment
  within their jurisdiction