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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.

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Weber’s Least Cost Theory

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  1. Weber’s Least Cost Theory

  2. 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

  3. 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

  4. 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

  5. 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

  6. 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

  7. 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 another-often 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

  8. 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

  9. 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?

  10. 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

  11. 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

  12. Weber’s Theory of Location Additional Contemporary Considerations: • Access to capital • Access to technology • Friendly regulatory environment • Political stability • Land cost • Inertia

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