LATEST LOCATION THEORIES

MBA 665A : Manufacturing Planning & Control

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Shashank Gupta (12807661)
Kumar Prateek (13364)
Akshay Chaturvedi (13071)
Shashank gautam (14633)
INTRODUCTION
Location theory has become an integral part of economic geography, regional science, and spatial economics.
Location theory addresses questions of what economic activities are located where and why. Location theory
or microeconomic theory generally assumes that agents act in their own self-interest. Firms thus choose
locations that maximize their profits and individuals choose locations that maximize their utility.

The development in the field of location theories can be placed under three main classes. The first category
of theories which cover least cost location theories, analyse the location of individual firm under the
conditions of perfect competition. They explore the relative attractions of labour, raw materials and market
locations when the location of all the other firms are known. The second class is of central place theory,
which studies locations at industrial level under conditions of imperfect competition. They are mainly
concerned with individual decision making. Whereas least cost approach analyses location decisions when
both market and materials are concentrated at points, central place theory and the interdependence models
assume areal markets and a homogeneous pattern of raw materials. All the three groups of theories have been
reviewed here.

Least Cost Theories of Location

The least-cost approach to location originated with Laundhart, Von Thunen and Alfred Weber. Later on
Hoover also followed almost the same approach to analyse the location of industries. Weber's classification
of industries into material oriented, market oriented and labour oriented has been one of the continuing
mainstream of locational analysis.

Webers theory of Location

Alfred Webers work entitled Ueber den Standort der Industrien was published in 1909. This is perhaps the
most interesting of the classical location analyses both in its depth and scope.
There existed a need for a general theory of locational factors which can be defined as advantages to be
obtained when an economic activity takes place at one point rather than elsewhere.
The general locational factors can be regarded as falling into two sub-categories:
1. The dimension of space introduces factors which pull an industry to and fro because of various
regionally operating variables. Three such variables can be distinguished:
a. The relative prices of deposits of raw material
b. The costs of transportation
c. The costs of labour
Of these the relative price differential of raw materials from various sources can be expressed in terms of
transportation costs, as it is equivalent to cheap for deposits situated near to the plant and dear deposits
further away. Consequently we can say that there are two general, regionally operating, location factors,
namely costs of transportation and the costs of labour. Being strictly a function of space, regional factors
can all be analysed from the point of view of the individual, isolated production process.
2. All the other factors of location work between industries and therefore are not to be found in any
examination of an isolated production process. They are grouped under the title Agglomerative
factor and work to create groupings of industrial processes in agglomeration of various sizes-
agglomeration which are not ascribed to regional factors.
Procedure of Analysis: Alfred Webers work is based on Cost Minimization approach.

Transport Orientation
Consider three components: (a) the distance to be moved, (b) the weight of the material inputs, outputs to be
moved, and (c) the effort or costs of moving given materials over unit distance.
Webers theoretical discussion is based on the assumption that all factors affecting transportation costs can
be expressed in either weight or distance units.
Weber realised multiple sources and multiple destinations to be the rule. Weber offers a solution to
situation with many sources of raw materials input (Mi) and centres of product consumption (C).
Alfred Weber used a location triangle to illustrate his approach. Logically a firm will locate within
the triangle joining the two points where the market is situated. Each point having a pull on the factory
depending on its transport costs. Weight loss industries are raw material orientated. Weight Gain
industries are market orientated. He devised the material index.
Material Index= Weight of Raw Material/ Weight of finished product.

A trial location P, is chosen within the locational figure. Distance from

this trial point to the consuming centre and four raw material sources are
measured and weighted by the values of transportation costs. The length
of each vector is kept proportional to the net movement input. The point
of minimum transport costs is that point where all attracting forces are
balanced and equilibrium is obtained.
M1, M2, M3, M4 are sources of raw material input
Figure. Location Force Diagram

Labour Orientation
Labour costs as distortion to basic transport costs pattern. According to Weber, a location can be moved
from the point of minimum transport costs to a more favourable labour location only if the savings in the
cost of labour, which this new location makes possible, are larger than the additional costs of transportation
which are involved. This was illustrated using concept of Isodopane, which is defined as an imaginary line
joining all points of equal cost of deviation from the minimum transport point. Thus, around the minimum
transport locations are a series of isodopanes, the value of which increases outwards.
There are two general characteristics of industries
which determine the degree of labour locations:
1. Index of labour costs: Defined as average
cost of labour which must be applied to a
ton of product. Industries with a low of
labour costs will be less attracted to labour
locations
2. Location weight: influences the extent to
which an industry may be deviated
through its effect upon the distance, and of
lesser importance, the form of the
Figure. Isodapane illustration isodopanes.

Isodapanes are drawn around the minimum
transport point, P, of location triangle M1,
M2, C. M2 is an unutilised raw material
source. Each bears an index of deviation
by moving away from P. L1 and L2 are
labour locations.
(i)
Weber connects two influences by introducing the
idea of the labour coefficient. This is given by the
amount of labour costs which will arise in an industry
for one ton of locational weight, leading to the labour
orientation of an industry.

Factors leading to Agglomeration

Forces are set up which lead to local accumulation or distribution of industry, may be social or cultural
phenomena, the consequence of particular economic or social conditions. In Weberian terms these are forces
promoting degrees of agglomeration and they operate only within the framework formed by the general,
regional factors. The question as to when industries will agglomerate is solved by a further application of
the Isodapane technique.
Two characteristics determine deviation tendencies towards agglomeration:

1. The locational weight: As in labour location analysis, this factor

determines the space of Isodapane and thus likelihood of intersection;
it need not take up any more space here than is needed. A geographical
factor is important here, also, will be the spacing of the production
points to start with. Closer production points, the more chance of
intersection.
2. The function of profitability: Can be split into those factors which reduce
costs and those which increase demand. Factors reducing cost will tend
to be obtained through agglomeration and corresponding critical
isodapanes of the locational figures will be further extended.
Central Place Theory
Central Place Theory (CPT) is an attempt to explain the spatial arrangement, size, and number of settlements.
The theory was originally published in 1933 by a German geographer Walter Christaller who studied the
settlement patterns in southern Germany. Christaller made number of assumptions like an isotropic surface,
evenly distributed population, evenly distributed resources, transport cost equal in all directions, no excess
profits, and similar purchasing power of all customers and customers will patronize nearest market.
A central place is a settlement which provides one or more services for the population living around it. Simple
basic services (e.g. grocery stores) are said to be of low order while specialized services (e.g. 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 sphere of influence is the area
under influence of the Central Place.

The theory consists of two basic concepts:

a. Threshold: The minimum population that is required to bring
the provision of certain goods or services.
b. Range of goods or services: The average maximum distance
people will travel to purchase goods and services.

Each market place will have a circular area as shown in the

diagram. However, the circular shape of the market results in
either un-served areas or over-served areas. To solve this
problem, Christaller suggested the hexagonal shape of the
markets as shown in D in the above diagram. Within a given area
there will be fewer high order cities and towns in relation to the
lower order villages and hamlets.
For any given order, theoretically the settlements will be
equidistance from each other. The higher order settlements will
be further apart than the lower order ones.

Christaller noted three different arrangements of central places

according to the following principles:
 1. The Marketing Principle:

The Diagram shows the arrangement of the central places

according to the marketing principle. There are orders of
central places: First order service center providing first order
services. Similarly, Second and third order service center.
The different orders of settlements arrange themselves in a
hierarchy. Generally, lower the order, larger is the number of
settlements and higher the order, greater is the area saved.

If the arrangement of the settlements is according to the

principle k=3, the theoretical number of settlements will
progressively divides the previous order by 3.

2. The Transportation Principle:

As an alternate arrangement, Christaller suggested that
central places could be arranged to what called the transport
principle as marketing principle is an awkward arrangement
in terms of connecting different levels of the hierarchy. The
traffic principle states that the distribution of central places
as possible lie on one traffic route between two important
towns i.e. they would be lined up on straight traffic route
which fan out from the central point. When Central places
are arranged according to the traffic principle, the lower
order centers are located at the midpoint of each side of the
hexagon rather than at corner. Thus transport principle
produces a hierarchy in a k=4 arrangement in which central
places are nested according to the rule of four.

3. The Administrative principle:

Christallers other suggested organizing principle was based
upon the realization that from a political or administrative
viewpoint centers it was unrealistic for centers to be shared.
Christaller suggested that an arrangement whereby lower
order centers were entirely with the hexagon of the higher
order center would obviate such problems. Such a pattern is
shown in the following diagram. All the six lower order
centers are fully subordinate to the higher order center which,
therefore, dominates the equivalent of seven market areas at
the next lowest level.
Hotelling Theory of Location
The simplest model illustrating aspects of the problems of locational interdependence and agglomeration is
the famous linear market duopoly model developed by Hotelling. He assumes two producers A and B who
sell a homogeneous product along a linear market (the standard example is of two ice-cream sellers on a
beach) at prices PA and PB. Consumers are evenly distributed, demand is inelastic and each consumer buys
one unit of output in each time period. Production costs are zero (a special case of the constant marginal costs
with changes in output or location) and each producer could supply the total market if allowed. Transport
cost is assumed to be constant and equals c per unit of output per unit of distance. The producers are free to
locate anywhere and can relocate at zero cost. The linear market is of length d. Each producer will be
guaranteed the sheltered market outside (a for A, b for B) but the market between them will be shared, with
A supplying x while B supplies y, so that market area boundary is defined where delivered prices are equal,

+ = +
Thus,
= +++
The problem is then to find out profit maximising locations for A and B. If A first chooses a location
(regardless of where it is) B's profit-maximising location will be determined by the function

2
= ( + )
2 3

This is maximised when b is as large as possible and this implies that B should locate adjacent to A on the
side nearest to the centre. However, unless A first choose a central location, this does not result in
equilibrium. Since A's profit is given by

2
= ( + )
2 3

Figure: Conditions of competition for the market.

The coordinates represent the prices for As and Bs
shops. The straight lines through E are the two lines
of maximum profit. On one of the curves through E,
As profit is everywhere 648; on the other, Bs is 578.
The lower curve is the one on which As profit is 200.
It pays A to maximise a, and to do this he 'leapfrogs' over B and locates immediately next to him, but on
his other side. This reduces profit for B and he is then induced to jump over A. This leapfrog game
continues until both are located at the centre of the market. This is a locational equilibrium because
neither can increase profits by relocating. Also, PA PB to protect each producer's sheltered market. Thus
profit maximisation induces agglomeration. Market forces result in a pattern that is socially wasteful
because transport costs are at a maximum whereas the minimum transport cost locations (a social
optimum) would require the firms to locate in dispersed fashion at each quartile.

Recent developments in Theories of Location Model

Loschs Theory of Economics of Location

This theory belongs to the market area or profit maximisation approach and has focused on spatial
variations in scales potential. August Losch was a German economist and he proposed his theory in 1939
in a book entitled Die taumliches Ordnung Derwirts Chaff. Its English translation was published in
1954 as Economics of Location.

He disregarded spatial variations in production costs by holding them constant, and instead depicted
optimal location as occurring where the largest possible market area is monopolised that is, where
sales potential and total revenue potential are maximised. Losch sought to explain the size and shape of
market areas within which a location would command the largest revenue.

His theory is based on following assumptions:

1. An isotropic surface.
2. For each firm there exists a behavioural pattern such that it seeks to locate at the most
profitable of the production points at which it can locate.
3. For each location there exist constant costs for the procurement and consumption of raw
materials.
4. Buyers are evenly dispersed over an area, and have identical demands.
5. Entrepreneurs act as economic men and their main aim is profit maximisation.

Losch established the hexagon as the ideal market shape, and viewed the trading area of the various
products as the nets of such hexagons. Figure10 helps to explain his choice of the hexagonal form. First,
a net of hexagonal market forms will completely cover any area under consideration, whereas circular
areas will either leave utilised area or will overlap.

Second, of all the regular polygons (hexagon, square, triangle, etc.) that will cover an area, the hexagon
deviates least from the circular form and in consequence minimises transportation expenditure in
supplying a given demand.
Losch established the hexagon
as the ideal market shape, and
viewed the trading area of the
various products as the nets of
such hexagons. Figure helps to
explain his choice of the
hexagonal form. First, a net of
hexagonal market forms will Fig10: Development of market areas from circular to hexagonal

completely cover any area under consideration, whereas circular areas will either leave utilised
area or will overlap.
Losch then attempts to find the maximum profit location by comparing, for different locations, both the
costs of production and the market area that can be controlled. Within the framework of this competitive
situation, the location chosen may not be the least-cost location, as the Weberian school predicts. Instead,
it will be the maximum profit location built on sales revenues rather than production and distribution
costs.
Thus, for each commodity or production type, the economic landscape is dissected into a series of
hexagonal nets of market areas. These nets are grouped according to the size of their respective market
units. After allowance has been made for the minimisation of transport effort, the resulting nets are
ordered around a common centre.
Thus, according to the model, at the centre of the economic landscape a large metropolis would arise
with all the advantages of a large local demand. With population and settlement localised into rich
sectors, industries become agglomerated in the same zones to gain economies of scale through linkage.
As a result, the greatest number of locations coincides, the maximum number of purchases can be made
locally, and the sum of the minimum distances between industrial locations is the least.
A number of criticisms have arisen concerning this Loschian industrial landscape such as, the model is
based on the assumption that the price of a commodity is a simple function of the demand for it, and this
is frequently unreal-istic. In this theory more emphasis has been given on demand. It has failed to take
into account the problems arising from locational interdependence of plants. Finally, Loschs calculation
of market demand was too crude and ignored many of the difficulties that entrepreneurs encounter in
trying to estimate the basis for their locational decision.

Walter Isards Theory of Substitution

Walter Isard had given the location theory in 1956 vided publication entitled, Location and the Space
Economy. Isard has modified the Loschian schema, in the attempt to make it more realistic. Isard linked
location theory to the general theory of economics through the substitution principle. In economic
theory, capital can be substituted for labour, for example. Similarly, the 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.
Thus, if the process of production is viewed as a combination of inputs to produce a specific output, the
principle of substitution will have two components:

1. A change in the size of operation (level of output) may change the proportion of inputs.
2. For certain production processes, the entrepreneur has, within technical limits, a freedom to
choose among alternative proportions of inputs to produce a distinct output or combination of
outputs.

Figure 11 provides one simple illustration of Isards substitution

principle. In Figure 11a we have the Weberian situation of one
market, C, and two material sources, M1 and M2. The line T to
S represents a set of possible locations arbitrarily chosen at three
miles from the consumption point, C. In Figure 11b, the distance
from M1 is plotted against the distance from M2 with respect to
the line T-S, referred to as the transformation line.
At location T, distance from M, is only two miles, but seven miles
from M2. Conversely, at location S the distances are
approximately four miles from M, and five miles from M2. As
one moves along this transformation line, distances are
increasing with respect to one material site as they are decreasing
for the other. If these distances are regarded as transport inputs
or costs, then the transport costs for one source are being
substituted for the cost of the second material source.
In order to determine the optimum location along the line T to S,
equal outlay lines are plotted on Figure 11c. These lines depict
the costs of trans-porting material from the two sources. Given
the objective of determining the optimum location, the place
selected will lie at the point, X, which is the lowest-cost point on
the line T to S for that equal-outlay line.

Therefore, based on the simple example of substituting among locations at a three-mile distance from the
consumption point, the optimum location will be at X with respect to transport costs from M, and M2. The
result of this analysis by Isard follows Weber, except for the conceptual emphasis on substitution.

Smiths Theory of Industrial Location

D. M. Smith in his theory has provided a theoretical framework for industrial location. His theory is also
known as Area-Cost Curve Theory. Smith has attempted to utilise the perfect competition-least cost
approach of Weber with some reference to the monopolistic competition-market area approach of Losch.
His conceptual design is quite straightforward and is based on the statements of other location theorists.
Recognising the complexity of the industrial location decision, Smith began by simplifying the real-world
conditions. He assumed a profit motive. He observed that processing costs vary in space as do revenues. The
most profitable location will be where total revenue exceeds total cost by the greatest amount. Figure 15.8
depicts the effect of spatial variations in cost and price and suggests the optimal location and spatial
profitability margins.

In Figure 12a costs are variable and demand is constant.

In this case, with the same revenue everywhere and only
costs varying, represents the point of maximum profits,
the optimal location. The limits of profitable operation, or
margins of profitability, a and b, can also be seen. Beyond
this margin costs exceed revenue, and a firm could only
operate at a loss. This is essentially the Weberian solution.
The reverse situation is shown in 12b. Here, costs are the
same every-where, but with spatial variations in price or
revenue. In Figure 12c the situation becomes more
realistic with both cost and price varying from place to
place.
Maximum profits are obtained at A, where costs are the
lowest (profit = A1 A2). Here, profits are higher than at
the point of highest price (1 B2). The entre-preneur
seeking maximum profits will therefore choose the least-
cost location, despite the lower total revenue obtainable
here.
Fig12 : Smiths Model of optimum location

Smith postulates his location model on the following assumptions:

1. All producers are in business to make profit
(but not necessarily the maximum profit).
2. All producers are fully aware of spatial
variations in costs and profits.
3. Sources of production factors like land,
labour and capital are fixed, and supplies are
unlimited, but no substitution can take place
between them.
5. No firm tries to take advantage of scale
economies.
6. No firm influences the location of another
firm.
7. All entrepreneurs are equally skillful.
8. No location is subsidised.
9. Demand (revenue) is constant over space.
Rawstrons Theory of Industrial Location
E. M. Rawstron has given a simple principle of industrial location, which is entirely based on geographical
elements. According to Rawstron, the industries are located at a place where cost is minimum. He pointed
out that first of all expen-diture on each element is to be examined and then location be determined at a place
of maximum profit; in other words, industries are established at a place where the cost is least.
He explained certain facts, such as:
(i) Special effective factors for the establishment of industries are raw material, market, land and
capital.
(ii) Locational cost of all types of expenditure.
(iii) Cost structure cost percentage of each item.
(iv) Zone of partial margin to profitability; this is the aspect when profit is converted to loss or loss is
converted into profit.
(v) Basic cost the cost which is different for each element according to amount and quality of the
factor.
Rawstrons theory is based on the following assumptions:
Mining is also considered as an industry.
Transport is only significant with industry. The main importance of transport lies in collection of
raw material and distribution of manufactured products; transport cost is always included in product
cost.
There are physical, economic and technological pressures in the estab-lishment of industries.
On the basis of above assumptions, Rawstron has suggested three principles;
1. Principle of Physical Restriction: The location of industry is always controlled by physical
factors. Among physical factors he has given prime importance to availability of minerals. There
are several places where occurrence of mineral is possible but it is necessary to find out where its
mining is profitable.
2. Principle of Economic Restriction: Rawstron has given two important economic aspects:

1. Cost Structure of Industry 2. Spatial Margins of Profitability

Including all the expenditure related with This is a point where cost of industry is more than
establishment and function of an industry, profit. Therefore, industry is established only after
especially expenditure percentage on labour, calcu-lation of profit margin and the best location
raw material, transportation, marketing, etc. is where cost is minimum.

3. Principle of Technical Restriction: Technical knowledge is a pre-requisite for every industry. It is

required more for certain industries. Therefore, due consideration should be given not only to the
availability of technology and its knowledge but also its cost.
Renners Theory of Industrial Location
Renner, in his work entitled, Geography of Industrial Localization, introduced introduced the industrial
location theory which is factor-oriented. Renner identified six factors for the location of industries, these are:
capital, transport, raw material, market, power and labour. These factors have direct impact on industrial
location but each factor affects differently. In his theory Renner has explained in detail the role of each factor
in industrial location as well as localisation of industries and also pointed that there is a tendency that many
factors may be available at a particular place.
More the factors available at a place more it will be suitable for the industrial location. Renner has given the
term industrial symbiosis for the combination of these factors. Such symbioses are of two types:

1. Disjunctive symbiosis 2. Conjunctive symbiosis

Disjunctive symbiosis is the condition when When in a region different types of industries
two or more different industries in some function with the help of each other. In such a case
region are beneficial for each other. product of an industry is utilised by other industry
as a raw material.

Renner has pointed out three principles of industrial location:

1. In the establishment of an industry all the six factors determine the location as well as cost
2. Industries are generally developed near those factors which are expensive
3. The location of industry also has direct impact on transportation.
The main criticism of the Renners theory is that due consideration to economic elements has not been given.
In regional context there is a difference in price and expenditure which has not been taken into consideration.
In spite of some drawbacks Renners theory is important. Its another characteristic is that it is simple and
away from mathematical concepts.

Conclusion

In this report we have sought to outline the key analytical insights generated by industrial location theory
and to point out the major methodological issues raised by this field of research. As we have seen, classical
and neoclassical location models pose fundamental problems which are largely un-addressed by the modern
clustering and agglomeration literatures, and yet which are essential in order to further our knowledge of
spatial behaviour. In response to this, we have argued, firstly, that it is essential to develop a transactions-
costs understanding of the internal and external technical and organizational relations of the firm. On the
basis of this reference framework it then becomes possible to ask theoretical location questions which are
empirically testable.
References

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