Transcript Weber`s Least Cost Theory

Weber’s Least Cost Theory
Locational Tendencies
• Primary: oriented toward raw material sources
• Services: market oriented
• Secondary: complicated spatial expression,
depending upon a set of factors
– Raw material location
– Markets
– Agglomeration economies
– Labor costs
Basic Assumptions in Location Decision
Making
• People are economically rational
• Producers and sellers are intent on maximizing
profit
• Best economic decisions result from market
mechanism:
– Price of land, labor, raw materials, energy,
transportation
– Price is a function of supply and demand
Weber’s Theory of Location
• Alfred Weber, German economist
• General theory (1909) is applicable to any
economic, political or cultural system
• Goal is minimum cost location
• Three categories of variable costs:
– Transportation
– Labor
– Agglomeration
Weber’s Theory of Location
• Assumptions:
– Isotropic plain
– One finished product with one market
– Fixed location of raw materials and market site
– Labor is fixed, but available in unlimited quantities
at production site
– Transportation is uniform and costs are a function
of weight and distance
Weber’s Theory of Location
Transport Costs:
• Single market and single source:
– Ubiquitous material results in location at the
market
– Pure material allows processing at market, source,
or an intermediate location
– Weight-losing material will be processed at the
source to avoid transporting waste material
Raw material location
• Weight losing operations are drawn to the raw
material source.
– Ex. Copper smelter, iron and steel, fruit and vegetable
packing, meat packing, orange juice, wine
• A break of bulk point is where a good is moved
from one mode of transportation to anotheroften an attractive location for production
– At Great Lakes ports of Chicago, Gary, Detroit,
Cleveland, and Toledo coal was brought by rail from
Appalachia and iron was shipped by boat from N.
Michigan and Minnesota for steel production
Weber’s Theory of Location
Transport Costs:
• One market and two sources:
– Equal distance and shipping costs dictates a
market location
– Two weight losing materials results in an
intermediate location
Weber’s Theory of Location
Labor Costs:
• Location chosen always has least combined
costs
• A location may have higher transport costs,
but less expensive labor…China?
Weber’s Theory of Location
Agglomeration:
• Weber recognized that clustering will result in
a per unit savings
– Shared Benefits
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Facilities
Labor force
Infrastructure
Services
Raw materials
Weber’s Theory of Location
Limitations of the Theory:
• There are geographic variations in market
demand
• There are terminal costs
• Transport costs are becoming less of a factor
• Labor is mobile and does not exist in unlimited
quantities
• Plants often produce a variety of outputs for
many markets
Weber’s Theory of Location
Additional Contemporary Considerations:
• Access to capital
• Access to technology
• Friendly regulatory environment
• Political stability
• Land cost
• Inertia