regional planning

1. SSR3033:
Theories & Techniques of Regional
Planning
Industrial Location Theory
10th and 11th October 2016
1

2. Objectives
• To explain the factors of production, industrial
location and how they relate to regional
growth and regional development;
• To describe the following theories/ models:
Weber’s Model, Losch’s Model and Bid Rent
Theory, and explain how the theories/models
are being applied (theory & application)

3. Industrial Location: Theory & Practice
Production Factors:
Input
Output
Market
Transportation
PRODUCTION
Input:
Land
Labour force
Capital
Output:
Goods
Services

4. Other production factors
• Location – determined by availability of
materials for production, input and output
• Other determinants – land, capital, labour/
workforce, and market
• Also – quality and quantity of work force,
geographical location, available infrastructure,
government policies

5. Class activity (8 per group) – 10 minutes
Your agricultural-based company is thinking
of setting up a factory in a new location. You
have asked your board members to a meeting
in order to finalise the following details:
• What is your new product?
• Where are you going to locate your factory?
• What are the factors that influence your
decision on the above two questions? Why?
5

6. 6
Industrial
Location
Theory
Often
associated
with
economists
Also involves
geographers –
spatial context
Aim: to find
the
OPTIMUM
location
Von Thunen
(18th Century);
Richardson
(19th Century);
Others:
Alfred Weber,
Losch,
Alonso

7. Industrial Location Theory
7
Weber’s Model of Least Cost
Location
Bid Rent Theory
Losch’s Market Area Analysis

8. Weber’s Model of Least Cost Location
• Main principle: entrepreneur will choose a
location which has the minimum cost for the
development of a new industry.
• Where should it be sited?
• What are the determinants?

9. Weber’s Model : Assumptions
1. Uneven distribution of natural resources.
2. Size and location of markets are given at fixed points
3. Wage rates are fixed; labor is immobile and unlimited
4. A uniform culture, climate and political system
5. Entrepreneurs minimize costs of production
6. Perfect competition exists
7. Cost of land, structures, equipment and capital do not
vary regionally
8. A uniform system of transport over a flat surface

10. Based on the
assumption, Weber
identified 3 factors
which determine
location:
1. Cost of transportation
2. Cost of labour
3. Agglomeration

11. Basic assumption:
11
Direct relationship between cost of
transportation and the distance
x3x 2x

12. RAW MATERIAL OR MARKET SITE?
• There are two potential locations to locate an
industry – near the raw material or market site.
• Using the Material Index after manufacturing
process – to determine the location of the factory.
Material Index = Total weight of materials used to manufacture the product
Total weight of the finished product

13. RAW MATERIAL OR MARKET SITE?
Material Index = Total weight of materials used to manufacture the product
Total weight of the finished product
Index Value = 1, product is natural material
Index Value = <1, the final product increased in weight,
the best location to determine the factory is close to the
market site. [e.g. market oriented products]
Index Value = >1, the final product experience weight
loss, the best location is close to the raw material site.
[Material oriented products]

14. RAW MATERIAL OR MARKET SITE? : Weight Losing Case
Source MarketProcessing
Location
Unit Cost
(Transport)
Figure 1
Source MarketProcessing
Location
Unit Cost
(Transport) Figure 2
What happen when the industry is
moved nearer to the source?
Market
Processing
Location
Source
Unit Cost
(Transport)
Figure 3
the best site to locate this industry is
to place it right at the source of raw
material = allows optimization of
transportation cost to the market.

15. RAW MATERIAL OR MARKET SITE? – Weight Gaining Case
Q: Why such curve? What happen when the industry
moves nearer to the market site?
Source MarketProcessing
Location
Unit Cost
(Transport)
Figure 1
Figure 2
Source MarketProcessing
Location
Unit Cost
(Transport)
Figure 3
Market
Processing
Location
Unit Cost
(Transport)
The best location to optimize
transportation cost is the market
itself.

16. What if labour cost is included?
T =Area with lowest
transportation cost
L = Location with cheap labour
cost (-$2 compared to T)
+$1
+$2
+$3
• Isodapane shows the
increase of transportation
cost as the distance
increases
• L = labor market where
the cost is lower by $2 as
compared to T
• A location will be able to
attract firms if the saving
from the labor cost is
greater that the increase of
transportation cost for each
unit output produced
INDUSTRIAL LOCATION THEORY: Weber’s Model

17. Bid-Rent Theory

18. Bid-Rent Theory
• Developed by Alonso
(1964) – based on the
concept of micro
economy.
• Land use pattern is
determined by its value –
related to transportation
cost.
• Each activity will have its
own bid-rent function and
combination of a few bid-
rents will explain the bid-
rent gradient
Bid Rent Func.
Housing
CBD Distance
Bid Rent Function
Retailer
Rent Per
Acre
Bid Rent Function
Manufacturing
d1 d2

19. Bid-Rent Theory: Assumptions
• The city is comprised of many identical
producers that operate in a perfectly
competitive environment.
• All land is privately owned
• All firms are identical and sell in competitive
markets, therefore, each firm generates a
normal rate profit, can sell as much as it
produces, and faces the same set of production
costs as all other firms

20. Bid-Rent Theory: Assumptions (contd)
• The market place for goods and services is
located in the center of city
• For a firm to sell its product it must be
transported to the market located at CBD
• Transportation costs are a linear function of
distance.
• The city’s population is evenly distributed and
households have uniform tastes for housing.

21. CBD Distance
Bid Rent Function
Rent Per
Acre
• Transportation cost in CBD is
lower – firms locating at CBD are
willing to pay more for centrally
located area in order to minimize
their transportation cost.
• Added transportation cost will
reduce profit, firms will not be
willing to pay as much for land at
more distant locations.
• More distance firms will only
be willing to bid up to the amount
at which lower land cost are
exactly off-set by their higher
transportation cost.
• Land value decline with
distance from the city centre$5 + $2 = $3 + $4
Near CBD Far from CBD
Land Transportation Cost

22. Bid-Rent Theory: Explanation
• The amount of money being paid for a certain
land use is known as “rent”.
• The changing value of land according to the
distant from CBD is known as “location rent”.
• Imagine: Potential land users are
conceptualized as participating in an open
bidding process such that the highest bidder for
a parcel of land will occupy that parcel.

23. Bid-Rent Theory: Explanation (contd)
• It is assumed that all persons involved in the
bidding process have complete information
about the land value – they will not offer price
higher than its worth – eventually the bid rent
will equals location rent.
• The graph that describes how rent declines
with distance from the CBD is called the bid-
rent function and illustrates how the value of
land reflects its accessibility to the CBD.

24. • What if there is more than one activity that need space to operate?
• For instance: Retail and Manufacturing.
CBD Distance
Bid Rent Function
Retail
Rent Per
Acre
Bid Rent Function
Manufacturing
d1
At point d1, the land use
pattern changes from retail to
manufacturing. Why is the
curve of the bid-rent function
for retail is much steeper?
If this process goes on and
doesn’t change, spatial
equilibrium will be achieved –
where land will be utilized for
activities that offer the highest
bid-rent.
INDUSTRIAL LOCATION THEORY: Bid-Rent Theory

25. Bid Rent Func.
Housing
CBD Distance
Bid Rent Function
Retailer
Rent Per
Acre
Bid Rent Function
Manufacturing
d1 d2
Forget the assumption that
users are distributed
evenly. Let’s allow the
household too, to bid for the
land usage.
There are household that desire
for locations nearer to CBD to
allow easy access to urban
facilities, and there are also
households desire for low
density housing areas with
generous greenery – parks.
Should this happen, the
household will have a less
steep curve compared to
retailing & manufacturing.
INDUSTRIAL LOCATION THEORY: Bid-Rent Theory

26. I
II
III
d1 d2
Retail
Rent Per
Acre
Manufacturing
Housing
d3
Distance from
CBD
I – Retail
II – Manufacturing
III - Housing
Beyond d3, urban
users do not value land
and its value falls to
the value of
agricultural land.
If the city is
symmetrical, the
pattern of land use will
form a set a
concentric rings as
shown in this slide.
INDUSTRIAL LOCATION THEORY: Bid-Rent Theory

27. Market Area Analysis
(Losch’s Model)

28. Market Area Analysis
• Losch criticised Weber’s least cost
approach (on labour and transportation)
to locate an industry as too much input
oriented.
• Losch: the optimum location will enjoy the
most profit i.e. highest sale volume

29. Losch’s Assumptions
• There is no differences in term of
production factor – even distribution of raw
materials, labor and capital on a
homogenous plain
• Equal density of population anywhere and
homogenous in taste
• There is no interdependence between firms.

30. •This is a simple curve of root
beer demand, assuming farmers
are the customers
• At the retail center adjacent to
farm P, the price per unit of root
beer is OP with PQ of demand
• As you go further to R,
transportation cost increases
the price to OR – with demand
reduces to RS
• For locations too far from the
market area, transportation cost
escalates to OF and demand is
zero
O
P Q
R S
F
Quantity
INDUSTRIAL LOCATION THEORY:
Market Area Analysis (Losch’s Model)

31. •Now imagine PFQ is rotated
along the PQ axis.
• You will get a demand cone
• The base of the cone = range
of market
• Height = the amount of sale at
any point
• Volume = the total amount of
market demand
**************
Similar to Weber’s Model, this
model ignore the “supply”
aspect; and focus solely on
“demand” to determine optimum
location.
F
R
P
Q
S
Base of the cone
INDUSTRIAL LOCATION THEORY:
Market Area Analysis (Losch Model)

32. Other considerations in determining
location?

33. Personal Factor
• Also play a role in determining the location of an
industry
• E.g. Automobile industry in Detroit and Morris
Plant in Crawley (England), Boots pharmaceutical
plant in Nottingham
• Due to its proximity to their hometown, families and
friends
• Also depending on supplier, climate and other
services
• Tiebout (1957): personal factors are more prevalent
in terms of siting a small industry compared to a
large industry.

34. Summary
• Weber’s Least Cost Theory: the location of
manufacturing establishments is determined by
the minimization of three critical expenses: labor,
transportation, and agglomeration.
• Bid-rent theory: how the price and demand for
real estate change as the distance from the
central business district (CBD) increases. It states
that different land users will compete with one
another for land close to the city center.
• Losch’s market area analysis: based on demand
and volume of sales
34

35. References
• Glasson (1978) Introduction to Regional Planning,
UCL Press: London
• Richardson, H (1993) –Regional & Urban
Economics
• http://www.yourarticlelibrary.com/industries/fac
tors-controlling-and-influencing-the-location-of-
industries-with-illustrations/25351/
• http://escholarship.org/uc/item/1k3927t6
• http://economics.uoregon.edu/wp-
content/uploads/sites/4/2014/07/BenjaminTruss
ell.pdf