Weber Least Cost Weber Least Cost Theory Theory

1.Assumption 1.Assumption

Isotropic plain Isotropic plain Four types of resources : ubiquitous, Four types of resources : ubiquitous,

sporadic, pure and grosssporadic, pure and gross Wages are fixed at any particular locationWages are fixed at any particular location One market One market Uniform transport systemUniform transport system Perfect competition Perfect competition

Weber suggested that manufacturing firms Weber suggested that manufacturing firms would locate in response to three factors: would locate in response to three factors:

Transport cost Transport cost Labour cost Labour cost Agglomeration economies Agglomeration economies

II. Least Transport Cost Theory II. Least Transport Cost Theory

Procurement cost : cost of transporting Procurement cost : cost of transporting raw material to factory raw material to factory

Distribution cost : transportation cost from Distribution cost : transportation cost from factory to the market factory to the market

Total Transport Cost : P+D Total Transport Cost : P+D

When Procurement cost > distribution cost When Procurement cost > distribution cost → material location → material location

When distribution cost > procurement When distribution cost > procurement cost→ market locationcost→ market location

When distribution cost & procurement When distribution cost & procurement costs are of equal importance → footloose costs are of equal importance → footloose location location

A. One market and one raw materialA. One market and one raw material

B. One market and two raw materials :B. One market and two raw materials :

(i)(i) Two raw materials required but both do Two raw materials required but both do not loose weight not loose weight

(ii)(ii) Two raw materials are sporadic Two raw materials are sporadic (iii)(iii) Two raw materials are found at fixed Two raw materials are found at fixed

locations, both undergoing weight loss locations, both undergoing weight loss

For two or more raw material :For two or more raw material :

1. Material Index = weight of localized raw 1. Material Index = weight of localized raw material / Weight of finished product material / Weight of finished product

>1 >1 →raw material (weight added)→raw material (weight added) <1 →market (weight reduced)<1 →market (weight reduced) =1 →footloose (anywhere in between)=1 →footloose (anywhere in between)

Isodapane Method Isodapane Method Procedure :Procedure :

The source of Rw and M is plottedThe source of Rw and M is plotted Plot lines of equal transport cost (isotims) arounPlot lines of equal transport cost (isotims) aroun

d each Rw source and market point d each Rw source and market point Total the sum of isotims at the intersection pointTotal the sum of isotims at the intersection point

s. This shows the total transport cost if the factors. This shows the total transport cost if the factory is located at that point y is located at that point

Finally connected the intersection with equal totaFinally connected the intersection with equal totals through the use of isodapane lines ls through the use of isodapane lines

The minimum value isodapane reveal the ideal fThe minimum value isodapane reveal the ideal factory location actory location

III. The effect of labour cost III. The effect of labour cost

Weber also recognized that at some locatiWeber also recognized that at some locations, the labour cost was cheap enough to ons, the labour cost was cheap enough to offset the increase in transport cost from thoffset the increase in transport cost from the least cost location e least cost location

IV. The effect of Agglomeration EconomiesIV. The effect of Agglomeration Economies

Industrial firms can lower its total cost of Industrial firms can lower its total cost of production by agglomeration themselves production by agglomeration themselves at the same locality gaining external at the same locality gaining external economies.economies.

Comment on Weber concept :Comment on Weber concept :

Merits :Merits :

clear analysis on factors affecting clear analysis on factors affecting industrial location industrial location

Brought forward the concepts “least cost Brought forward the concepts “least cost location”, “ material index”location”, “ material index”

Demerits :Demerits : Least transport cost theory : transport, raw Least transport cost theory : transport, raw

material become less important nowadaysmaterial become less important nowadays Least labour cost : skills of labours more iLeast labour cost : skills of labours more i

mportant than cost of labourmportant than cost of labour

Agglomeration of economics : concept corrAgglomeration of economics : concept correct but changed to global agglomeration ect but changed to global agglomeration

Focus mainly on economic factor, ignore bFocus mainly on economic factor, ignore behaviour factor ,people can be satisficers ehaviour factor ,people can be satisficers > economic men> economic men

Cannot foresee the importance of certain lCannot foresee the importance of certain locational factor : technology, government ocational factor : technology, government

Cannot foresee the decline of certain factoCannot foresee the decline of certain factor : raw material, transport r : raw material, transport