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Industrial Models. Industrial Models. Primary industries have to be located near the source of materials Secondary industries are becoming less dependent on resource location Location theory: predicts where businesses will or should be located

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Industrial Models

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Industrial models l.jpg

Industrial Models


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Industrial Models

  • Primary industries have to be located near the source of materials

  • Secondary industries are becoming less dependent on resource location

  • Location theory: predicts where businesses will or should be located

  • Location depends on raw materials, labor, transportation, and infrastructure.


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What businesses want

  • A decision maker would want to maximize their advantages over competitors, and make as much profit as possible

  • They have to take friction of distance into account

    • Friction of distance: the increase in time and cost that comes with increasing distance

  • The further away you send the goods to be manufactured, the greater the friction of distance is


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Raw Materials and Markets


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Weber’s Model

  • Alfred Weber (1868-1958) is the von Thunen of industry

  • He developed a model for industrial location called the Least Cost Theory

  • His theory accounts for the location of a manufacturing plant in terms of the owner’s desire to minimize 3 categories of cost:

    • Transportation, labor, and agglomeration


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Transportation

  • Transportation is the most important factor

  • A site must entail the lowest possible cost of moving raw materials to the factory, and finished goods to market

    Notes:

    -Truck is the least expensive mode of transport over short distances

    -Air is most effective for high value, or perishable goods

    -Shipping is the cheapest form of transportation over long distances


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Labor

  • Higher labor costs reduce margin of profit

  • Companies might do better to locate in areas where labor is cheap, if the price of labor justifies the higher transportation costs


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Agglomeration

  • Agglomeration: a substantial number of enterprises cluster in the same area, and share talents, services, and facilities

  • Ex: office furniture

  • Big city locations are desirable

  • However, it also causes higher rents and wages

  • Leads to deglomeration (leaving urban centers for other locations)


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Examples of Agglomeration

  • World Cities: an important city in the global economy

    • Immanuel Wallerstein proposed the World-System Theory that social change in the developing world is linked to economics of the developed world

  • First tier cities include Tokyo, London, and New York

    • They are all centers of global commerce

    • Demonstrate agglomeration

    • Example: Wall Street


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Weber’s Locational Theory Triangles

Triangle A represents a situation where M is the market, and S represents primary sources

Triangle B represents a situation where M is the market, S represents primary sources, and P represents a manufacturing center


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Area is completely uniform (physically, politically, culturally and technologically) - This is known as the isotropic plain assumption.

Manufacturing involves a single product to be shipped to a single market whose location is known.

Inputs involve raw materials from more than one known source location.

Labor is infinitely available but immobile in location.

Transportation routes are not fixed but connect origin and destination by the shortest path; and transportation costs directly reflect the weight of items shipped and the distance they are moved.

***Even if you think Weber leaves much to be desired, he did set in motion a debate on SPATIAL aspects of economic activities

Assumptions of Least Cost TheoryKnow all six assumptions


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Hotelling’s Model

  • Harold Hotelling (1895-1973) was an economist who built on Weber’s model

  • He wanted to understand locational interdependence

  • Asked what two ice cream vendors would do on a beach

    • Said they would begin at opposite ends, and then gradually end up back-to-back

    • Once there, they would be unlikely to move


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Hotelling Continued

  • His theory shows that location of one industry cannot be understood without referencing other similar industries

  • Think about the ice cream example

    • Is standing back-to-back the best place for the vendors if they want to maximize profits?

    • Is that best for the customers?

    • Is that best for visibility?


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Losch’s Model

  • August Losch examined where a manufacturing plant could locate to maximize profits

  • He added spatial influence of consumer demand, and production costs to his calculation

    • Businesses will try to locate within a margin of profitability, and to the left or right of the margin, distance decay will make sales unprofitable


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Site and Situation

  • Site factors that influence the location of an industry include land, labor, and capital

  • Situation factors include access to inputs and access to markets

    • Situation factors are chosen to minimize transportation costs


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Other models

  • Be sure to read the Industrial Lab description of various early models

  • There are six questions based on the models

  • The lab is also on my website


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