Theories Of Industrial Location

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Theories Of Industrial Location

  1. 1. Theories of Industrial Location
  2. 2. 4 main Classifications <ul><li>Theories can be related to certain factors: </li></ul><ul><li>Cost factors (Weber 1909) </li></ul><ul><li>Locational interdependence (Hotelling 1929) </li></ul><ul><li>Demand (Losch 1939) </li></ul><ul><li>Profit (Smith and Pred (1971)) </li></ul>
  3. 3. Alfred Weber (1909) Least Cost Theory <ul><li>Industry is located where the transportation costs of raw materials and final product is a minimum. </li></ul><ul><li>He had two cases: </li></ul>
  4. 4. The Weight Losing Case <ul><li>The weight of the final product is less than the weight of the raw material going into making the product </li></ul>
  5. 5. The Weight Losing Case <ul><li>The weight of the final product is less than the weight of the raw material going into making the product </li></ul>
  6. 6. The Weight Losing Case <ul><li>The weight of the final product is less than the weight of the raw material going into making the product </li></ul>
  7. 7. The Weight Losing Case <ul><li>The final product is heavier than the raw material that require transport. </li></ul><ul><li>Usually this is a case of some ubiquitous (everywhere available) raw material such as water </li></ul>
  8. 8. The Weight-gaining Case
  9. 9. The Weight-gaining Case
  10. 10. The Weight-gaining Case
  11. 11. Location Triangle <ul><li>Alfred Weber used a location triangle to illustrate his approach </li></ul><ul><li>His example being that only 2 raw materials are needed. Logically a firm will locate within the triangle joining the two points where the market is situated. Each point having a pull on the factory depending on its transport costs. </li></ul><ul><li>Weight loss industries are raw material orientated </li></ul><ul><li>Weight Gain industries are market orientated. </li></ul>
  12. 12. <ul><li>He devised the material index </li></ul><ul><li>Material Index = Weight of Raw Material </li></ul><ul><li>Weight of Finished Product </li></ul><ul><li>Weber built on his idea to use Isotims ( concentric rings that connect equal-cost points) </li></ul><ul><li>And Isodapanes (Variations in total transport costs) </li></ul>
  13. 13. Isotims and Isodapanes
  14. 14. Have a go! <ul><li>According to Weber, where will you locate the new brewery and why? </li></ul>Materials per case Rail Transport cost Road transport cost Hops & Grain £1 per mile £1.10 per mile Spring Water 15p per mile 10p per mile Bottled Beer 25p per mile 28p per mile
  15. 15. Booming Town Now put Weber's theory to work in deciding where to locate a new steel factory for a growing town: Material (per case) Rail Transport Cost Road Transport Cost Iron £1.50/mile £1.62/mile Coal 75p/mile 82p/mile Steel 67p/mile 75p/mile
  16. 16. Hotelling 1929 Locational Interdependence <ul><li>This is the impact of demand upon location </li></ul><ul><li>The interaction of entrepreneurial decisions </li></ul><ul><li>He used two ice cream sellers on a beach as an example </li></ul>
  17. 17. As with all models it made certain Assumptions <ul><li>Evenly distributed population </li></ul><ul><li>Market served by two competing entrepreneurs, with equal production costs and capable of supplying the entire market, producing two identical products. </li></ul><ul><li>Infinitely Elastic demand </li></ul><ul><li>Costs of production are the same everywhere </li></ul><ul><li>Entrepreneurs capable of relocating without cost </li></ul>
  18. 18. <ul><li>Hotelling believed that for a time each seller would want to out do each other by cutting prices or changing position on the beach. </li></ul><ul><li>After failing to oust each other, (Since they are equally able to compete) they would agree to compromise by agreeing to sell at the same price at different locations therefore each would have a 50% share of the market. </li></ul><ul><li>They would position themselves at the centre of the two market areas. </li></ul>
  19. 19. <ul><li>If another seller entered the market a similar process would take place. </li></ul><ul><li>ISSUES: </li></ul><ul><li>The initial assumptions were seen as unrealistic and very rare in business. </li></ul><ul><li>Nevertheless it did look at the principle of decision making based on competing organisations. </li></ul>
  20. 20. Group work <ul><li>Within your tables write down the good and bad points that you foresee with these models. Both groups discuss the evolution of industrial location theory for Wednesday where there will be a class lead discussion. </li></ul><ul><li>Try to find the meaning for the term ‘Friction of Distance’ </li></ul><ul><li>Boys find out and write a resume of Smith and Pred’s theory. </li></ul><ul><li>Girl’s find out and write a resume of the main points of Losch’s theory </li></ul>
  21. 21. Further reading <ul><li>Guinness and Nagle pages 137 – 139 </li></ul><ul><li>http:// www.sjsu.edu/faculty/watkins/losch.htm </li></ul><ul><li>D. Waugh pages 507-512 </li></ul><ul><li>B. Knapp pages 395-399 </li></ul>

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