Location Theory:

The Foundation of Planning and other

Economic Theories
and Models
A Presentation for AR 433A: Planning 3

Location Theory
Location theory is concerned with the geographic location of economic activities;
it addresses the questions of what economic activities are located where and why.

It rests primarily on the assumption that agents act in their own self interest. Thus,
firms choose locations that maximize their profits and individuals choose locations
that maximize their utility.

Various factors which affect location are considered such as localized materials
and amenities, but most weight is placed on transport costs.

Early location theory was concerned with agricultural land use, as modeled by von
Thnen and with industrial location theory by Alfred Weber. Modern location theory
has been concerned with the real individual, rather than with rational economic
man reflecting the influence of behavioral geography

David Ricardo

David Ricardo (19 April 1772 11 September 1823) was an English

political economist, and was one of the most influential of the classical
economists. His most famous work is his Principles of Political Economy
and Taxation wherein he discussed his theories on labor value, RENT and
comparative advantage.

Ricardo is known for his differential rent theory based on fertility but he also
gave "situation" as a possible cause of rent.

If all land had the same properties, if it were unlimited in quantity, and
uniform in quality, no charges could be made for its use, unless where it
possessed peculiar advantages of situation.

Economic rent: the difference between the produce obtained by the

employment of two equal quantities of capital and labor
: the payment over and above what is necessary to stay in business

Johann Heinrich von Thunen

Johann Heinrich von Thnen (24 June 1783 - 22 September

1850) was a prominent nineteenth century German economist and
landowner, who in the first volume of his treatise, The Isolated State
(1826), developed the first serious treatment of spatial economics,
connecting it with the theory of rent first developed by David
Ricardo. That is, he took the Ricardian notion of rent one step further
by introducing distance and space. He is sometimes referred to as
the father of location theorists.

Postulates that transport cost depends on the distance from the

market and different kinds of products. The gain from farming per
unit area (locational rent) decreases with increasing distance from
the market.

Coined the term Location rent (land value), which is economic rent
minus the costs associated with transporting products to market

Johann Heinrich von Thunen

L = Y(P C) YDF wherein
L: Locational rent (in DM/km2)
Y: Yield (in t / km2)
P: Market price of the crop (in DM / t)
C: Production cost of the crop (in DM / t)
D: Distance from the market (in km)
F: Transport cost (in DM / t / km)

Based on this equation he theorized that Producers

(farmers) aim to maximize location rent by minimizing the
transportation costs of getting goods to market.

Johann Heinrich von Thunen

Model of Agricultural Land
von Thnen gave a predictive model of rural development around an
idealized isolated urban center, imposing several simplifications in
an attempt to focus on some of the fundamental processes at work
in settlement patterns and rural economic activity.

Simplified assumptions:
The city is located centrally within an "Isolated State."
The Isolated State is surrounded by wilderness
The land is completely flat and has no rivers or mountains
Soil quality and climate are consistent
Farmers in the Isolated State transport their own goods to market via
oxcart, across land, directly to the central city. There are no roads
Farmers behave rationally to maximize profits.

Johann Heinrich von Thunen

Johann von Heinrich
Thnen concluded that the
cultivation of a crop is only
worthwhile within certain
distances from the city:
beyond that, either the cost of
the land becomes too high,
with increasing distances
transport costs also increase,
or, if there is another product
having greater yield or lower
transport costs

Alfred Weber

Alfred Weber (30 July 1868 2 May 1958) was a German economist, sociologist
and theoretician of culture whose work was influential in the development of
modern economic geography. He is the author of Theory of the Location of
Industries, studied industrial location decisions, and built on von Thunens theory
by considering not only the costs of getting goods to market, but also the costs of
transporting material inputs to the manufacturing plant.

Considered Transportation cost as the direct function of the weight of the item
and distance shipped.

He asserted that all else being equal, manufacturers will locate their plants either
at the market or the source of the input depending on whether or not the final
product gains weight or loses weight in the manufacturing process.

Weber formulated a theory of industrial location in which an industry is located

where the transportation costs of raw materials and final product is at a minimum
(least-cost location). He gave two special cases of finding the least-cost
location as described below. His model allowed for three types of locations: (1)
raw materials locations, (2) a production site for final goods, and (3) a
consumption center.

Webers Weight-Losing Case

The weight of the final product is less than the weight of the raw
material going into making the product.

Fig. 1 Situation in which the processing plant is located somewhere between the source and
the market. The increase in transport cost to the left of the processing plant is the cost of
transporting the raw material from its source. The rise in the transportation cost to the right
of the processing plant is the cost of transporting the final product. Note the line on the left
of the processing plant has a steeper slope than the one on the right because the raw
material is heavier than the finished good. Fig. 2 Situation if the processing plant is moved
closer to the source of raw material. Note that the transport cost of the final product
delivered to the market is lower than in the previous location. The optimal location of the
processing plant is at source of the raw material, as shown in Fig. 3.

Webers Weight-Losing case

Transportation
cost for the
product delivered
to the market will
be lowest of all if
the processing
plant is located at
the source of the
raw material.

Webers Weight-Gaining Case

The final product is heavier than the raw materials that requires
transport

The weight gaining case is illustrated in Figs. 4, 5 and 6. The optimal location
of the processing plant in this case is at the market.

Webers Weight-Gaining case

Transportation cost
for the product
delivered to the
market will be lowest
of all if the
processing plant is
located at the
market.
Weber established that firms producing goods less bulky than the raw
materials used in their production would settle near the raw-material source.
Firms producing heavier goods would settle near their market. The firm
minimizes the weight it has to transport and, thus, its transport costs.

William Alonso

Extended the von Thnen model to

urban land uses.
His model gives land use, rent, intensity
of land use, population and employment
as a function of distance to the CBD of
the city as a solution of an economic
equilibrium for the market for space.
He postulated that there is an inverse
relationship between transportation
cost and rent such that if transportation
cost is high, then the rent is low.
He developed the "Bid-Price Curve": A
set of combinations of land prices and
distances among which the individual is
indifferent (i.e. satisfied with the
combination of land price as well as the
distance at some point).

Locational determinants of commercial and

industrial use

COST

- price and rent of land fall with increased distance from the CBD.

wages are higher in the center

- local demand for labor being greater than local supply.
- commuting costs need to be offset by higher remuneration. (transport
cost more of a reflection of accessibility than distance)
- locations close to junctions, nodes and terminals are particularly
favored maximizing proximity to suppliers and markets.
- decentralized shopping centers are being developed following road
improvement and increased car ownership.
- modern manufacturing industry relies increasingly on heavy road
vehicles for long distance transportation and incurs lower transport
costs on the fringes of cities than at more central locations.

Locational determinants of commercial

and industrial use
REVENUE

Retailing revenue is determined by the size of the shopping catchment area

or hinterland, not just in terms of population but in terms of purchasing
power.
Distribution of the day-time population and points of maximum transit
(where people cluster together) are also important.
In the case of offices, the spatial distribution, number and size of client
establishments determine revenue.
Revenue is thus greatest within the CBD and so are the aggregate costs.
- as distance from the center increases, revenue falls and aggregate
costs (after falling initially) rises.
- this is due to the upward pull of transport costs, which are no longer
offset sufficiently by economies in the use of land and labor.
- only within a fairly short distance from the CBD are commercial
users able to realize high profitability.

Locational determinants of commercial

and industrial use

PROFITABILITY

To maximize profits, firms need to locate where they can benefit from
both the greatest revenue and from the lowest costs.

- specialized functions and activities serving the urban market as a

whole will locate centrally.

- firms requiring large sites and those attempting to reduce costs of overconcentration will be attracted to the suburbs.
- firms locating close together to benefit from complementary will incur lower
costs because of external economies and enjoy higher revenue due to joint
demand.
> since there is a high degree of inertia, most firms find it difficult to
adjust their locations to the optimum.
> a satisfactory rather than ideal location moreover is established by
zoning and land use controls.

Locational determinants of commercial and

Industrial use
A mixture of interacting influences usually explain each locational
decision.
.....as price mechanism largely decides the profitability or utility of
goods and services, it subsequently determines the location of
activity and the spatial structure of the urban area supplying these
goods and services
.....high levels of accessibility within the CBD are reflected in low
transport cost attracting greatest demand for commercial sites
.....conversely, low over-all accessibility and high transport cost
outside urban areas will attract a much lower level of demand.
.....other possible influences: changes in population, technology and
transportation, pressures from redeveloped central areas and local
and central government policy.

Locational determinants of commercial and

industrial use
LOCATION

> A factor which, as propagated by the adage location, location,

location is considered to be the foremost determinant in the

catalyzing of the decision to purchase.
> True in the practice of conventional suburban development
> Downside being that a preexistence of excellence in location is
invariably associated with high cost of land acquisition
> Created by proximity to a desirable factor such as transportation, a
waterfront, a slope, a long vista, a pleasant climate, a popular
resort, or a desirable community
> Only method to economically achieve the value added by location
is to create it on inexpensive land through PUD.

Walter Christaller
Analyzes the size distribution and firm
composition of cities
A geographical that seeks to explain the
number, size and location of human
settlements in an urban system
Settlements simply function as central
places providing services to surrounding
areas

Central Place Theory-W. Christaller

Central Place Theory extends the idea to the case
where there is a hierarchy of cities as well as a
distinction between urban and rural areas.
Central Place Theory is based on the idea that
different types of firms have different market areas
and that cities are composed of these firms.

A market area is the area over which a firm can

under price its competitors
Size depends on the relative production costs of
firms, the cost of transportation, and the level of
demand

Central Place Theory-W. Christaller

A Central Place is a settlement which provides one or more services for the
population living around it.

Simple basic services, i.e. food, household items (things that replenish frequently)
are said to be low order
Specialized services (e.g. computers, universities) are said to be of high order.

Having a high order service implies there are low order services around it, but not
vice versa.

Settlements which provide low order services are said to be low order settlements.
Settlements that provide high order services are said to be high order settlements.
The minimum population size required to profitably maintain a service is the
threshold population.

Factors affecting a fall in the threshold population are:

1. A decrease in population
2. Change in tastes
3. Introduction of substitutes

Central Place Theory-W. Christaller

The theory consists of two basic concepts:
1) threshold--the minimum market needed to
bring a firm or city selling goods and services
into existence and to keep it in business
2) range--the average maximum distance
people will travel to purchase goods and
services
Normally, the threshold is found within the
range, as the diagram shows.

Central Place Theory-W. Christaller

Central Place Theory-W. Christaller

Central Place Theory-W. Christaller

Central Place Theory-W. Christaller

Central Place Hierarchy

Hamlets

Villages

Towns

Number of Places

20

Average Population

417

948

2433

Average No. of Establishments

6.9

54.4

149

Average No. of Functions

5.9

32.1

59.8

Average No. of Establishments per Functions

1.2

1.7

2.5

Central Place Theory-W. Christaller

Conclusion

The larger the settlements, the fewer their number

The larger a settlement, the farther away a similar size
settlement is
The Range increases as the population increases
The larger the settlement, the higher the order of its services.
Deviations to this rule are:
o Tourist resorts that have a small population but large number
of functions.
o Dormitory towns that have a large population but a small
number of functions

August Losch
Improved Webers theory by introducing the
demand factor.
He assumed that manufacturers are driven to
maximize profit by locating at the place that
maximizes the difference between revenues
and costs.
He went on to assert, however, that it is
impossible for a firm to evaluate all possible
points in order to find the place of greatest
money profit.

Walter Isard
Further developed the isotropic sphere by
introducing the concept of substitution into a
general synthesis of the works of Von Thunen,
Weber, and Isard.
That is, selection of a manufacturing site from
among alternative locations can be viewed as
substituting expenditures among the various
production factors such that the best site is
chosen.

Allen Pred
Introduced a behavioral matrix in which
the quantity and quality of information
available to a decision maker is graphed
on the y-axis and their ability to use
information is graphed on the x-axis.
In this matrix the perfect location
decision would be found at the
intersection of perfect knowledge and
ability to use that knowledge.

Michael Weber
The Impact of Uncertainty on Location,
1972. Primarily concerned with adding more
complexity into the isotropic sphere by
introducing the uncertainty principle, which
effectively dismisses the assumptions of
perfect knowledge of alternatives and
complete information.
The greater the level of uncertainty, the
greater the risk.

David Smith

Brought into question the role of profit

maximization as the sole motivator of
location decisions. When choosing
location, firms consider other factors that
are either quantifiable or unquantifiable.

End of presentation.
Thank you.