1. Firms make location decisions based on profit maximization by minimizing transportation costs of inputs and outputs. This includes considering factors like input transportability, localization economies, taxes, and public services. 2. The principle of median location predicts firms will locate at the point that equally splits total monetary weight of inputs and outputs being transported. This minimizes combined procurement and distribution transportation costs. 3. Urbanization economies from access to markets, labor, and intermediate goods pull firms toward large cities, while transportation costs of certain inputs may push firms closer to input sources. Labor availability and costs also influence location choices.

1. MATAKULIAH
EKONOMI PERKOTAAN
Pertemuan Ke.5
Where do Firm Locate ?

2. Where Do Firms Locate ?
The location decisiona of firms are based on profit maximization
:
1. It is cosly to transport input & output
2. Some inputs can’t be transport at all
3. Localization economies & urbanization economies
4. The public sector levies taxes & provides public good &
services.

3. TRANSFERABLE INPUTS & INPUT
• Single transferable output
• Single transferable input
• Fixed-factor proportion
• Fixed prices
The firm maximizes its profit by minimizing
its transportation cost.

4. Resources-Oriented Firms
Monetary Weight for a Resource-Oriented firm
Input(wood) output(bats)
Physical weight (tons) 10 3
Transport rate (cost/to/mile) $1 $2
Monetary weight (physical weight $10 $6
Time rate)

5. Total transport cost for Resources-Oriented Firm
$
10
6
2
F 2 4 6 8 10 M
x (distance from forest)
(PC)
(DC)
Total transport cost=PC+DC
PC = wi . ti . X
DC = wo . To .(xM-x)
w = weight (i-o)
t = transport cost
x = distance

6. Market – Oriented Firms
A marked oriented firm is defined as a firm that
has relatively high cost for transporting its output
to the market.
Monetary Weight for a Market-Oriented Firm
Input(sugar) output(beverage)
Physical weight(tons) 1 4
Transport rate(cost/ton/mile) $1 $1
Monetary weight(physical weight
time rate) $1 $4

7. Total Transport Cost for a Market-Oriented Firm
$
50-
40-
30-
20-
10-
2 4 6 8 10
Sugar x (distance from input r ) M
plantation
Procurement
cost
Total transport c =
PC+DC
Distribution
cost

8. Scale Economies in Transportation
• Fixed cost  processing paperwork, loading &
unloading a shipment
• Average cost transportation decrease as the
distance increases.
• Line-haul economies:the transport cost per mile
decreases as the distance increases, reflecting
the efficiencies from using different mades for
diferent distance.
- short haul  truck
- long haul  trains , ships

9. The Principle of Median Location:
to predict where a firm will locate
The optimum location is the median
transport location, the location that splits
the total monetary weight of the firm into
two equal halves. At the median location,
half the monetary weight comes from one
direction, and half from the other direction.
Consider the location decision of Ann,who
makes and delivers pizzas to consumers
along a highway.

10. a.Pizza delivery & the principle of Median Location
b.Median Location in the Large City
a. W x y s z
Distance from w 0 1 2 3 9
Number of consumers 2 8 1 10
Monetary weight $4 $16 $2 $20
b.
Location S1 S2 S3 S4 L
Demand 4 4 4 4 17

11. Transshipment Points and Port Cities
The sawmill Locates at the Port
Input sources A
Monetary weight=$15
Input sources B
Monetary
weight=$15
Output market Port
M P
Monetary weight=$10

12. A. ENERGY ORIENTATION
B. LOCATION & URBANIZATION ECONOMIES
A  What is the role of energy in the location decision of firm ?
The development of electricity affected the location patterns of
manufacturers.
For some activities, the availability of cheap energy is still an
important location factor.
B  Urbanization economies refer to the cost savings associated with
producing in a large city. Afirm that benefits from urbanization
economies will be pulled toward large cities, with their inexpensive
intermediate goods and services, extensive knowledge spillovers,
and large labor poll. Urbanization economies lead to self reinforcing
growth, as firms locate in large cities because so many other firms
are already located there.

13. LABOR MARKETS AND LOCATION CHOICES
• Transport Cost versus Labor Cost
• Labor in the Long Run
• Labor and Natural Amenities
• Learning and Location

14. LOCAL PUBLIC SERVICES AND TAXES
• Taxes and Location Decisions
• Public Services and Location Decisions
• Subsidies and Incentive Program :
1. Tax abatement
2. Industrial bonds
3. Government loans and loan guarantess
4. Site development
• Professional Sports, Stadiums ,and Jobs

15. CASE STUDIES AND EMPIRICAL RESULTS
• The Semiconductor Industry. 3 types of labor :
1. Research & development
2. Wafer fabrication
3. Assembly Into component
• Japenese Automobile Firms
• Mexican Garment Industry
• Carpet Manufacturing & Location Ec.
• GM’s Saturn Plant
• Effects of Wages and Unions