Webers Least Cost Theory Locational Tendencies Primary oriented

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 • • • 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