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Weberian model


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Weberian model

  2. 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. 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.
  5. 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
  6. 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
  7. 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.
  8. 8. PROCEDURES FOR FINDING OPTIMUM LOCATION • Stage 1 - Least Transport Cost • Stage 2 - add in Labour Saving • Stage 3 - add in Agglomeration Economies
  9. 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
  10. 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
  11. 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
  12. 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
  13. 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
  14. 14. Raw material market Seeking for the least transport cost site Step 1
  15. 15. GROUPINGS OF RAW MATERIALS ubiquitous localized pure gross
  16. 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
  17. 17. Working out of the material index(MI) MI = Weight of raw material Weight of finished product Method 1
  18. 18. Material index of sugar milling: 7 tonnes of sugar cane = 1 tonne of raw sugar 7
  19. 19. Material index of beer manufacturing 10 tonnes of wheat = 100 tonnes of beer 0.1
  20. 20. Material index of manufacture of cloth: 10 tonnes of yarn = 10 tonnes of cloth 1
  21. 21. M.I. Greater than 1 Weight-loss industry Material-oriented
  22. 22. M.I. Small than 1 Weight-gain industry Market oriented
  23. 23. M.I. Equal to 1 No weight-gain nor weight loss industry Footloose location
  24. 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
  25. 25. Tapering freight structure Distance
  26. 26. distance Stepped freight rate
  27. 27. distance Transportcost Road Rail Sea Different transport rates
  28. 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
  30. 30. CASE 2: COPPER ORE
  31. 31. ALFRED WEBER, 1909 ISOTIMS • Isotim • Line of equal transport cost for any material, RM or FP
  32. 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. 34. ALFRED WEBER, 1909 LABOUR COSTS – CRITICAL ISODAPANE • Lower labour cost locations OR • Cheaper locations due to agglomeration economies • Total cost saving - per unit
  35. 35. ALFRED WEBER, 1909 OVERLAPPING CRITICAL ISODAPANES • Agglomeration economies
  36. 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 levels
  37. 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.
  38. 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
  39. 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.
  40. 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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