1. The document discusses various location theories proposed by Alfred Weber, Hotelling, Christaller, Hoover, Losch, and Isard. 2. Weber's location theory from 1909 proposed that firms choose locations where costs are lowest, considering factors like raw material costs, transportation costs, and labor costs. 3. Hotelling's location theory from 1929 examined how two competing firms on a linear city would choose locations to maximize market coverage.

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2. Alfred Weber’s Location Theory(1909)
 Weber’s basic principle is that a firm would choose location where costs are the
least.
 There existed a need for a general theory of “locational factors” which can be
defined as advantages to be obtained when an economic activity takes place at
one point rather than elsewhere.
 The general locational factors can be regarded as falling into two sub-
categories:
 The dimension of space introduces factors which pull an industry to and fro
because of various regionally operating variables. Three such variables can be
distinguished:
1. The relative prices of deposits of raw material
2. The costs of transportation
3. The costs of labour
 All the other factors of location work between industries and therefore are not
to be found in any examination of an isolated production process. They are
grouped under the title “Agglomerative factor” and work to create
groupings of industrial processes in agglomeration of various sizes-
agglomeration which are not ascribed to regional factors.

3. Transport Orientation
 Transport cost are influenced by three basic elements.
 The weight to be transported.
 The distance to be covered.
 The nature of commodity.
 If MI is greater than one then the firm is material oriented.
 If MI is less than one then the firm is market oriented.
 If MI is equal to one then the firm is material as well as market oriented.
 MI= Material Index
Material Index= Weight of local materials input
Weight of final products

4. Locational Triangle

5. Labour Cost
 According to Weber, another regional factor for deviation of
Industry from one place to another is Labour Cost. It happens
due to Difference in labour costs.
 The Labour costs may differs due to two reasons:-
 Differences in wage rates.
 Differences in the level of efficiency.
 According to him, If savings in labour cost per unit of output are
greater than the extra transport cost per unit then the industry
take deviation from Least Transport Cost Point to Least
Labour Cost Point.
 This was illustrated using concept of “Isodopane”, which is
defined as an imaginary line joining all points of equal cost of
deviation from the minimum transport point.

6.  Labour cost per unit at L are less than $6 than at point T, as L is
within isodopane $6, the firm would, other things being equal, will
divert its location at the point of reduced labour cost i.e. at ‘L’.

7. Agglomerative Factors
 Meaning: Agglomerative refers to the advantages or
cheapening of cost production due the concentration
of an industry.
In others words –minimizing cost of
production due to centralization of many industries
in a particular area through internal and external
economics of various kinds such as:-
• Sharing of equipments
• Specialization
• Large scale of business and selling

8. Locating the Centre of Agglomeration
 Extending the concept of isodapanes.

9. References for Weber’s Theory
 A. Weber, Ueber den Standort der
Industrien(Tubingen, 1909). English translation
with introduction and notes by Friedrich, Alfred
Weber’s Theory of the location of
Industries(Chicago: University of Chicago Press,
1929).
 David James Reid, The Theory of Industrial
Location: Alfred’s Weber Contribution Reappraised
(Glasgow University, 1966)

10. HOTELLING’S LOCATION THEORY(1929)
• He represented this notion through a line of fixed length. Assuming all
consumers are identical (except for location) and consumers are evenly
dispersed along the line, both the firms and consumer respond to
changes in demand and the economic environment
• In Hotelling’s Location Model, firms do not exercise variations in
product characteristics; firms compete and price their products in only
one dimension, geographic location. Therefore, traditional usage of
this model should be used for consumers who perceive products to be
perfect substitutes or as a foundation for modern location models

11. HOTELLING’S PRINCIPLE OF MARKET COPETITION
 Two competitors will select locations A and B for optimal market coverage.
With P1 being the market price, the market boundary would be F1 (point of cost
indifference) since right of F1, customers would get a lower price at location B
instead of at location A and left of F1, customers would get a lower price at
location A. If for any reasons, location A is able to lower the market price from
P1 to P2, then its market area would expand at the expense of location B, from
F1 to F2

12. MODELS OF LOCATIONAL COMPETITION: A CRITICAL REVIEW
-Ricardo Biscaia and Isabel Mota
 This critical review focuses on the development of spatial competition models in which
the location choice of firms plays a major role.
 LOCATIONAL COMPETITION – THE ROOTS:
 According to Fetter, consumers compare the prices in both firms and the freight costs
needed to buy that product before making their choice.
 In his model there exists a city represented by a line segment, where a uniformly
distributed continuum of consumers has to buy a homogenous good in order to survive.
 Firms simultaneously choose their locations and afterwards set their prices in order to
maximize their profits.
 COURNOT COMPETITION:
 Cournot competition has less realistic assumptions, such as the delivered price setting
and the competition in quantities itself, which is less realistic than competition in prices.
 However, the results are more realistic, as the agglomeration result may be obtained
more easily, and it is a fact that firms sell everywhere in the city, in contrast with the less
realistic result of a “market area” for each firm.

13. CONCLUDING THE CRITICAL REVIEW…..
 After the appearance of the Hotelling (1929) model ,scientists had access to a
simple and successful means of introducing a locational component into the
modelling behaviour of economic agents. This review has focused on the
developments that were intended to explain the equilibrium locations of the
firms, mainly when competing in a duopoly.
 In the 80s, this field became a hot topic for research. There are numerous
applications of the Hotelling model, which mainly focus on changing the
framework assumptions.
 Furthermore, researchers could intensify the relationship between spatial
competition and Industrial Organization. For example, spatial competition may
provide a more complete answer in relation to vertical
differentiation/integration of duopoly firms.

14. References for Hotelling Theory
 Aguirre I, Espiñosa MP (2004) Product
differentiation with consumer arbitrage.
International Journal of Industrial Organization,
Vol. 22, No. 2, pp. 219-239.
 Anderson S (1988) Equilibrium existence in the
linear model of spatial competition. Economica,
Vol. 55, pp. 479-491.

15. Central Place Theory (1933)
 Central Place Theory (CPT) is an attempt to explain the spatial arrangement,
size, and number of settlements
 A central place is a settlement which provides one or more services for the
population living around it. Simple basic services (e.g. grocery stores) are said
to be of low order while specialized services (e.g. universities) are said to be of
high order.
 The theory consists of two basic concepts:
 Threshold: The minimum population that is required to bring the provision of
certain goods or services.
 Range of goods or services: The average maximum distance people will
travel to purchase goods and services.

16.  Each market place will have a circular
area as shown in the diagram. However,
the circular shape of the market results in
either un-served areas or over-served
areas.
 To solve this problem, Christaller
suggested the hexagonal shape of the
markets as shown in D in the above
diagram. Within a given area there will be
fewer high order cities and towns in
relation to the lower order villages and
hamlets.
 For any given order, theoretically the
settlements will be equidistance from
each other. The higher order settlements
will be further apart than the lower order
ones.

17. The Marketing Principle(k=3)
 The Diagram shows the arrangement of
the central places according to the
marketing principle.
 There are orders of central places: First
order service center providing first
order services. Similarly, Second and
third order service center. The different
orders of settlements arrange
themselves in a hierarchy. Generally,
lower the order, larger is the number of
settlements and higher the order,
greater is the area saved.
 If the arrangement of the settlements is
according to the principle k=3, the
theoretical number of settlements will
progressively divides the previous order
by 3.

18. The Transportation Principle(k=4)
 The traffic principle states that
the distribution of central places
as possible lie on one traffic route
between two important towns i.e.
they would be lined up on straight
traffic route which fan out from
the central point.
 When Central places are
arranged according to the traffic
principle, the lower order centers
are located at the midpoint of
each side of the hexagon rather
than at corner. Thus transport
principle produces a hierarchy in
a k=4 arrangement in which
central places are nested

19. The Administrative Principle(k=7)
 Christaller’s other suggested
organizing principle was
based upon the realization
that from a political or
administrative viewpoint
centers it was unrealistic for
centers to be ‘shared’
 All the six lower order centers
are fully subordinate to the
higher order center which,
therefore, dominates the
equivalent of seven market
areas at the next lowest level.

20. Hoover’s Theory
 Hoover gave a least cost theory of location in which he tried to remove the
problems associated with Weber’s theory of location.
 Hoover starts with the assumption of perfect competition between producers
or sellers at any one location.
 Secondly, he assumes perfect mobility of factors of production and takes
transportation costs and production or extraction costs as the determinants of
location. He considers extractive industries first, with the location of deposits
given, and attempts to find the area that each producing point will serve. The
delivered price for any buyers will be the cost of extraction plus transport
costs.

21. Hoover’s Theory
 He represented this by a system of isotims, radiating from the point
of production and joining places of equal delivered price.
 Buyers will obtain the commodity from the source that offers the
lowest delivered price and the boundary between the market area of
two producers will be a line joining the points at which delivered
price is the same from both sources.
 As long as the cost of extraction does not vary with output, transport
costs are the only variable affecting price, but Hoover extends his
analysis to include the influence of diminishing returns to scale.
 The least-transport-cost location is found by drawing isotims around
given material and market points, from which lines of equal total
transport cost (isodopanes) can be constructed.
 He also shows how different sections of the market will be served by
different producing points.

22. Hoover’s Theory
 He also differs with Weber's emphasis on least transport cost
points within locational triangles. Even with the assumption of
uniform transport costs, the possibility of a separate minimum
point not at one corner of the triangle is much less than might
be thought at first sight. It is far more likely than what Weber
suggested that a material or the market will have a pull which
will be greater than that of the other corners. The chance of a
location not at one corner is even less likely, if the fact that
transfer costs are actually less than proportional to distance is
also considered.
 If a separate point away from material sources and market does
occur, Hoover suggests that perhaps this is a sign that industry
is not primarily transport oriented at all and that possibly a low
labour cost location enters into the picture.
 He claims that in practice the influence of transfer costs tends to
locate production at markets, at sources of raw material, or at
junction breakpoints in the transport network.

23. Hoover’s Theory
 In considering production costs, he views it as a possible production
point if the saving in labour cost compensates for increasing transfer
charges.
 Hoover considers economies of concentration as a part of production
costs.
 Hoover's contribution has its limitations too.
 He viewed transport orientation as something that could be analysed
separately and did not integrate, other causal factors into his theory as
fully as he might have done.
 Despite his references to market areas, he was much concerned with
cost than with the demand factor.
 Hoover failed to probe deeply into locational interdependence.

24. Losch’s Theory of Location
 This theory belongs to the ‘market area’ or ‘profit maximisation’
approach and has focused on spatial variations in scales potential.
 He disregarded spatial variations in production costs by holding them
constant, and instead depicted optimal location as occurring where the
largest possible market area is monopolised
 Losch then attempts to find the maximum profit location by comparing, for
different locations, both the costs of production and the market area that
can be controlled.
 Within the framework of this competitive situation, the location chosen
may not be the least-cost location, as the Weberian school predicts.
Instead, it will be the maximum profit location built on sales revenues
rather than production and distribution costs.

25. Losch’s Assumptions
 (i) An isotropic surface.
 (ii) For each firm there exists a behavioural pattern such that it seeks to
locate at the most profitable of the production points at which it can locate.
 (iii) For each location there exist constant costs for the procurement and
consumption of raw materials.
 (iv) Buyers are evenly dispersed over an area, and have identical demands.
 (v) Entrepreneurs act as economic men and their main aim is profit
maximisation.

26. Development of market areas from circular to hexagonal
Losch’s Assumptions
• Losch established the hexagon as the ideal market shape, and viewed the
trading area of the various products as the nets of such hexagons.
• A net of hexagonal market forms will completely cover any area under
consideration, whereas circular areas will either leave utilised area or will
overlap.
Why Hexagon?
Of all the regular polygons (hexagon, square, triangle, etc.) that will cover
an area, the hexagon deviates least from the circular form and in
consequence minimises transportation expenditure in supplying a given
demand.

27. The Principle of Substitution
• The principle of substitution over space was first put forward by the
German economist A. Predohl in 1928.
• The concept as further developed by Isard and Moses in the late 1950s
leads to the conclusion that if one allows for factor substitution and
assumes a nonlinear production function, then the optimality of a
location will depend on the characteristics of the input, the level of
output, and the nature of the demand schedule.
• The principle of substitution will have two components:
1. A change in the size of operation (level of output) may change the
proportion of inputs.
2. For certain production processes, the entrepreneur has, within
technical limits, a freedom to choose among alternative proportions of
inputs to produce a distinct output or combination of outputs.

28. Isard’s Theory of Substitution
• Isard linked location theory to the general theory of economics through the
substitution principle.
• The selection of a manufacturing site from among alternative locations can be
viewed as substituting expenditures among the various production factors
such that the best site is chosen.
We have the Weberian situation of one market,
C, and two material sources, M1 and M2.
The line T to S represents a set of possible
locations arbitrarily chosen at three miles from
the consumption point, C.

29. • The distance from M1 is plotted against the
distance from M2 with respect to the line T-S,
referred to as the transformation line.
• As one moves along this transformation line,
distances are increasing with respect to one
material site as they are decreasing for the other.
• In order to determine the optimum location
along the line T to S, equal outlay lines are
plotted. These lines depict the costs of trans-
porting material from the two sources.
• Given the objective of determining the optimum
location, the place selected will lie at the point,
X, which is the lowest-cost point on the line T to
S for that equal-outlay line.
Isard’s Theory of Substitution

30. Rawstron’s Theory of Industrial Location
E. M. Rawstron in his work, “Three Principles of Industrial Location”, has
given a simple principle of industrial location, which is entirely based on
geographical elements.
He explained certain facts, such as:
• Special effective factors for the
establishment of industries are raw
material, market, land and capital.
• Locational cost of all types of
expenditure.
• Cost structure – cost percentage of
each item.
• Zone of partial margin to profitability;
this is the aspect when profit is
converted to loss or loss is converted
into profit.
• Basic cost — the cost which is
different for each element according
to amount and quality of the factor.
According to Rawstron, the industries are located at a place where cost is
minimum. He pointed out that first of all expenditure on each element is to be
examined and then location be determined at a place of maximum profit; in
other words, industries are established at a place where the cost is least.

31. Rawstron’s Theory contd.
Three Principles of Industrial Location
1. Principle of Physical Restriction - The location of industry is always
controlled by physical factors. Among physical factors he has given prime
importance to availability of minerals. There are several places where occurrence
of mineral is possible but it is necessary to find out where its mining is
profitable.
2. Principle of Economic Restriction - Rawstron has given two important
economic aspects :
Cost Structure of Industry
Including all the expenditure related with
establishment and function of an
industry, especially expenditure
percentage on labour, raw material,
transportation, marketing, etc.
Spatial Margins of Profitability
This is a point where cost of industry is
more than profit. Therefore, industry is
established only after calculation of profit
margin and the best location is where cost
is minimum.

32. Rawstron’s Theory contd.
3. Principle of Technical Restriction - Technical knowledge is a pre-requisite
for every industry. It is required more for certain industries. Therefore, due
consideration should be given not only to the availability of technology and its
knowledge but also its cost.
In brief, Rawstron’s theory is basically a theory of least cost and industries
are always located at a place where cost is least.

33. Fetter’s Law of Industrial Location
In his work “Laws of Industrial Location”, Fetter proved that all the
production can be sold in the markets which are having unlimited demand.
This means that industries can been located according to the demand and
consumption.
According to Fetter, the place having minimum cost is the place of maximum
profit.
Fetter’s Laws :
1. If two centres are having same
production cost and transportation cost
around them, the location of industry
will be along centre line
Ideal location between market A & B

34. Fetter’s Laws contd.
2. If production cost is varied, the
boundary of industry will be
inclined towards the centre of
higher production cost.
3. If production cost is similar and
transport cost is higher at one centre
then the market boundary will be
inclined towards the centre having
higher transport cost
 Palander has further elaborated this principle in 1953 and taken into consid-
eration the factor of competition and allocation of markets.
 Greenhunt also based his thoughts of interdependence of minimum cost and
localisation of industries.

35. Renner’s Theory of Industrial Location
Renner, in his work entitled, “Geography of Industrial Localization”, introduced
the industrial location theory which is factor-oriented.
Renner identified six factors for the location of industries, these are: capital,
transport, raw material, market, power and labour.
These factors have direct impact on industrial location but each factor affects differently.
More the factors available at a place more it will be suitable for the industrial location.
Renner has given the term industrial symbiosis for the combination of these factors.
Disjunctive symbiosis
It is the condition when two or more
different industries in some region
are beneficial for each other.
Such symbioses are of two types:
Conjunctive symbiosis
When in a region different types of industries
function with the help of each other. In such a
case product of an industry is utilised by
other industry as a raw material.

36. Renner’s Theory of Industrial Location contd.
Renner has pointed out three principles for the industrial location:
 In the establishment of an industry all the six factors determine the location,
as well as cost.
 Industries are generally developed near those factors which are expensive
 The location of industry also has direct impact on transportation
The main criticism of the Renner’s theory is that due consideration to economic
elements has not been given. In regional context there is a difference in price and
expenditure which has not been taken into consideration.
In spite of some drawbacks Renner’s theory is important. It’s another
characteristic is that it is simple and away from mathematical concepts.

37. Other Theories
• Allen Pred’s Theory (1967) is based on behaviourial approach. The behav-
iourial approach draws on a human being as a satisfier. Allen Pred published
his theory entitled ‘Behaviour and Location’ in which he devised a
behavioural matrix to illustrate an analysis of locational decisions.
• The factors like globalisation and growth of multinational companies have
also become important.
• Study of the effects of transportation systems and innovations on the location
and future development of an area provides insight into the explanation of
certain industrial concentrations.
• The Game Theory, Linear Programming Models, The Multiplier Model,
Product Cycle Model, etc., have also dealt with locational pattern of
industries in their regional context.

38. Thank You