Weber s Least Cost Theory

Transcription

1 Weber s Least Cost Theory

2 Industry seeks to maximize profits by minimizing produc=on costs A company faces two geographical costs: Site Situa=on

3 Situa=on Factors A manufacturer tries to locate its factory as close as possible to both the buyers and sellers Transporta=on costs

4 Weber s Theory of Loca=on Transport Costs: Single market and single source: Ubiquitous material results in loca=on at the market Pure material allows processing at market, source, or an intermediate loca=on Weight- losing material will be processed at the source to avoid transpor=ng waste material

5 Alfred Weber s Theory Alfred Weber, German economist General theory (1909) is applicable to any economic, poli=cal or cultural system. Goal is minimum cost loca=on Three categories of variable costs: Transporta=on Labor Agglomera=on

6 Loca=onal Tendencies Primary: oriented toward raw material sources Services: market oriented Secondary: complicated spa=al expression, depending upon a set of factors Raw material loca=on Markets Agglomera=on economies Labor costs

7 Basic Assump=ons in Loca=on Decision Making People are economically ra=onal Producers and sellers are intent on maximizing profit Best economic decisions result from market mechanism: Price of land, labor, raw materials, energy, transporta=on Price is a func=on of supply and demand

8 Weber s Theory of Loca=on Basic Assump=ons: Isotropic plain One finished product with one market Fixed loca=on of raw materials and market site Labor is fixed, but available in unlimited quan==es at produc=on site Transporta=on is uniform and costs are a func=on of weight and distance

9 Weber s Theory of Loca=on Transport Costs: One market and two sources: Equal distance and shipping costs dictates a market loca=on Two weight losing materials results in an intermediate loca=on

10 Raw material loca=on Weight losing (aka Bulk- reducing) industrial opera=ons are located closer to the raw material source, to cut the cost of shipping FINAL PRODUCT WEIGHS LESS THAN THE RAW MATERIAL Ex. Copper smelter, iron and steel, fruit and vegetable packing, meat packing, orange juice, wine

11 Loca=on near Markets Cost of transpor=ng goods to the consumer is a cri=cal loca=onal factor for three industries: bulk- gaining, single market, and perishable.

12 Bulk- gaining industries A bulk- - - gaining industry makes something that gains volume or weight during produc=on. Examples include: So[- drink bo\ling, Potato Chips, Automobile industries, refrigerators, televisions

13 Single Market Manufacturers They make products sold primarily in one loca=on, so they also cluster near their market Motor Vehicles: Clustered in auto- alley)

14 Perishable Must be located near the market so they will not go bad, while traveling X distance. Examples: Bread Milk Daily Newspaper

15 Weber s Theory of Loca=on Labor Costs: Loca=on chosen always has least combined costs A loca=on may have higher transport costs, but less expensive labor China?

16 Weber s Theory of Loca=on Agglomera=on: Weber recognized that clustering will result in a per unit savings Shared Benefits Facili=es Labor force Infrastructure Services Raw materials

17 Weber s Theory of Loca=on Limita=ons of the Theory: There are geographic varia=ons in market demand There are terminal costs Transport costs are becoming less of a factor Labor is mobile and does not exist in unlimited quan==es Plants o[en produce a variety of outputs for many markets

18 Weber s Theory of Loca=on Addi=onal Contemporary Considera=ons: Access to capital Access to technology Friendly regulatory environment Poli=cal stability Land cost Iner=a

19 Ship, Rail, Truck, or Air? Companies seek the lowest- cost mode of transporta=on, but the cheapest of the four modes changes with the distance it will travel and the weight of product Cost can vary based on loading, unloading, fuel used, weight of product, etc.

20 Break- of- Bulk Points Many companies that use mul=ple transporta=on modes locate at a break- of- bulk point A good is moved from one mode of transporta=on to another- o[en an a\rac=ve loca=on for produc=on 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 produc=on