2. 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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4. 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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5. WEBER’S MODEL
• Aim: find out the optimum location of a factory
• Optimum location = least cost location
• Assumptions
• isotropic surface / uniform plain
• different labour cost at different
locations but labour is not mobile
• single mode of transport and transport
cost is direct proportion to distance
and weight
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6. • perfect competition(same product,
same quality, same price)
• entrepreneurs are economic rational
(minimize cost)
• resources (raw materials)
• ubiquitous (everywhere)
• localized (fixed)
• pure (no weight change)
• gross (weight loss)
Material index=
Weight of localized raw materials
Weight of finished product
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7. WEBERIAN MODEL: LEAST COST
APPROACH
• Assumptions
• Uniform or isotropic plain in a single country
• One finished product at a time is considered
• The raw materials are fixed at certain locations (known) and
the point of consumption is also fixed and known.
• Labor is fixed geographically but its availability is unlimited.
• Transportation costs are a direct function of weight of the
item and the distance shipped.
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8. PROCEDURES FOR FINDING OPTIMUM
LOCATION
• Stage 1 - Least Transport Cost
• Stage 2 - add in Labour Saving
• Stage 3 - add in Agglomeration
Economies
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9. THE FOUR STAGES OF THE
PRODUCTIVE AND DISTRIBUTIVE
PROCESS
1. Securing the place of the location and the fixed
capital for equipment
2. Securing the materials and the power and fuel
sources
3. The manufacturing process itself
4. The shipping of the goods
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10. COST INVOLVED IN EACH STAGE OF
THE PRODUCTIVE AND
DISTRIBUTIVE PROCESS
• Interest rates of the fixed and operating capital of
the different stages, and the power, the cost of
labor, transportation costs, the general expenses
and the cost of land.
• Which of these elements vary according to location
and thus represent general regional factors of
location?
• Labor costs and transportation costs
• Agglomerative factors
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11. FACTORS SHAPING WEBERIAN
SPATIAL OUTCOMES
• Transportation sets the general regional pattern
of manufacturing
• Weight and Distance; Material Index
• Then, consider spatial variations in the cost of
labor
• Coefficient of Labor
• The final determinant is agglomeration
economies
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12. STEPS OF FINDING OUT THE LEAST
COST LOCATION
• Step 1: find out the least transport cost
site
• Step 2: consider if the production unit will
move to a cheaper labour cost site
• Step 3: consider if the production unit will move to a
site where agglomeration economies are available
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13. Total transport cost equals to
Cost of moving raw materials to the
production unit/ procurement cost
Plus
Cost of moving finished products
to the market/ distribution cost
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15. GROUPINGS OF RAW MATERIALS
ubiquitous localized
pure gross
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16. RAW MATERIAL CLASSES
• Spatial Distribution of Availability
• Ubiquitous raw materials -- Air
• Localized raw materials -- Coal
• Weight Loss during Processing
• Pure raw materials – water
• Gross raw materials – Iron ores
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17. Working out of the material index(MI)
MI =
Weight of raw material
Weight of finished product
Method 1
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18. Material index of sugar milling:
7 tonnes of sugar cane =
1 tonne of raw sugar 7
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19. Material index of beer manufacturing
10 tonnes of wheat =
100 tonnes of beer
0.1
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20. Material index of manufacture of cloth:
10 tonnes of yarn =
10 tonnes of cloth
1
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21. M.I. Greater than 1
Weight-loss industry
Material-oriented
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22. M.I. Small than 1
Weight-gain industry
Market oriented
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23. M.I. Equal to 1
No weight-gain nor
weight loss industry
Footloose location
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24. TRANSPORTATIONS COSTS
• The cost of collecting raw materials (RM)
• The cost of distributing the finished products (FP)
• The total transportation cost (TTC)
TTC = RM + FP
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28. SUMMING UP
• Freight rate varies from goods to goods
• Freight rate tends to taper off with increasing
distance
• Freight rate varies among different transport means
• Transshipment point offers additional advantage
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31. ALFRED WEBER, 1909
ISOTIMS
• Isotim
• Line of equal
transport cost for any
material, RM or FP
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32. ALFRED WEBER, 1909 -
ISODAPANES
• Isodapane
• Line of total transport costs
• Determined by summing the value of all isotims at a
point
• And joining all points of equal total transport costs
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34. ALFRED WEBER, 1909
LABOUR COSTS – CRITICAL
ISODAPANE
• Lower labour cost locations OR
• Cheaper locations due to agglomeration economies
• Total cost saving - per unit
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36. Applicability of Weber’s
modelTo what extent the model represents the reality?
Assumption 1: an isotrophic plain, uniform physical and
human settings
Reality: it rarely exists in the real world
Assumption2: uniform transport system, freight rate is
directly proportional to weight and distance
Reality: it rarely exists, freight rate tends to taper off with
increasing distance.
Assumption 3: labour is at fixed points and with different
rates
Reality: labour is more mobile and with different skill
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37. Assumption 4: markets are at fixed points, perfect
competition exists.
Reality: they exist as an area, monopoly likely occurs.
Assumption 5: industrialists are economic men, profit
maximizers.
Reality: it is hard for them to have complete
knowledge, they tend to be a satisfizer.
Assumption 6: apart from transport, labour and
agglomeration economies, other factors don’t vary
Reality: land price, government policy, technology
and behavioral factors become
increasingly significant in industrial location.
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38. 2. LOCATIONAL
INTERDEPENDENCE THEORY
HAROLD 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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39. 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 other’s 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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40. 3. PROFIT-MAXIMIZATION -
AUGUST 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.
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