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Fourth test next week on last week and this week’s lectures, 40 MC questions. Study the PowerPoint and use the Study Guide that will be on the website.

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Presentation on theme: "Fourth test next week on last week and this week’s lectures, 40 MC questions. Study the PowerPoint and use the Study Guide that will be on the website."— Presentation transcript:

1 Fourth test next week on last week and this week’s lectures, 40 MC questions. Study the PowerPoint and use the Study Guide that will be on the website. Questions are taken from all PowerPoint slides. Data questions: Know general trends, not numbers.

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3 Manufacturing Location To Do List What it is and what it includes. Commodities, goods & bads, capital & consumer goods, durables-non-durables, finished-semi finished, obligatory- discretionary & elasticity. Manufacturing Location Theory: from weight watching to getting satisfaction: Basics: cost curves and surfaces. Weber and the weight loss hypothesis: maximization approaches. Losch and the pursuit of profit as a locational determinant: optimization approaches. Smith and the margins of profitability: behavioral approaches. Simon and satisficing: decision making approaches. Structural approaches and the international division of labour.

4 Definitions of “Things” and Basic Economic Concepts

5 Definitions Manufacturing is the term widely used to describe the process of taking raw materials and semi-finished components and creating semi-finished or finished products from them. Some industries, such as steel and computing, used the term fabrication instead of manufacturing. All economic activities are divided into an economic classification system using the North American Industrial Classification System (NAICS). DEFINITIONS

6 Sectors Primary Tertiary Secondary Tertiary Quaternary

7 NAICS 2012 CLASSIFICATION STRUCTURE – SECTORS 11 Agriculture, forestry, fishing and hunting 21 Mining, quarrying, and oil and gas extraction 22 Utilities 23 Construction Manufacturing 41 Wholesale trade Retail trade Transportation and warehousing 51 Information and cultural industries 52 Finance and insurance 53 Real estate and rental and leasing 54 Professional, scientific and technical services 55 Management of companies and enterprises 56 Administrative and support, waste management and remediation services 61 Educational services 62 Health care and social assistance 71 Arts, entertainment and recreation 72 Accommodation and food services 81 Other services (except public administration) 91 Public administration Industry Group

8 31-33 Manufacturing 311 Food Manufacturing 312 Beverage and Tobacco Product Manufacturing 313 Textile Mills 314 Textile Product Mills 315 Clothing Manufacturing 316 Leather and Allied Product Manufacturing 321 Wood Product Manufacturing 322 Paper Manufacturing 323 Printing and Related Support Activities 324 Petroleum and Coal Products Manufacturing 325 Chemical Manufacturing 326 Plastics and Rubber Products Manufacturing 327 Non-Metallic Mineral Product Manufacturing 331 Primary Metal Manufacturing 332 Fabricated Metal Product Manufacturing 333 Machinery Manufacturing 334 Computer and Electronic Product Manufacturing 335 Electrical Equipment, Appliance and Component Manufacturing 336 Transportation Equipment Manufacturing 337 Furniture and Related Product Manufacturing 339 Miscellaneous Manufacturing NAICS: The Manufacturing Sector‘s 21 Classes Manufacturing 311 Food Manufacturing 312 Beverage and Tobacco Product Manufacturing 313 Textile Mills 314 Textile Product Mills 315 Clothing Manufacturing 316 Leather and Allied Product Manufacturing

9 31-33 Manufacturing 311 Food Manufacturing 312 Beverage and Tobacco Product Manufacturing 313 Textile Mills 314 Textile Product Mills 315 Clothing Manufacturing 316 Leather and Allied Product Manufacturing 321 Wood Product Manufacturing 322 Paper Manufacturing 323 Printing and Related Support Activities 324 Petroleum and Coal Products Manufacturing 325 Chemical Manufacturing 326 Plastics and Rubber Products Manufacturing 327 Non-Metallic Mineral Product Manufacturing 331 Primary Metal Manufacturing 332 Fabricated Metal Product Manufacturing 333 Machinery Manufacturing 334 Computer and Electronic Product Manufacturing 335 Electrical Equipment, Appliance and Component Manufacturing 336 Transportation Equipment Manufacturing 337 Furniture and Related Product Manufacturing 339 Miscellaneous Manufacturing Manufacturing 311 Food Manufacturing 312 Beverage and Tobacco Product Manufacturing 313 Textile Mills 314 Textile Product Mills 315 Clothing Manufacturing 316 Leather and Allied Product Manufacturing NAICS Code Hierarchy for Textile Mills to Six Digits

10 Other Definitions Other terms and types of goods are also commonly used: Commodities and commodification. Goods and ‘Bads’. Tangible, intangible, common, public goods. Finished and semi-finished products. Capital and consumer goods. Durable and non-durable goods. Discretionary and non-discretionary goods. DEFINITIONS

11 Commodities and Commodification Commodities have two meanings in economics: It is a general terms that includes all goods and services produced to satisfy wants and needs. It is a specific term that refers to goods that have no qualitative differentiation across a market, such as wheat, pork bellies, oil. Most use of the term these days refers to qualitatively similar raw material goods. In fact the term commodification refers to the process by which goods are made similar. For example, the wine industry has been ‘commodified’ by mass consumption – that is, there is little difference between products at similar price points – terroir is no longer. DEFINITIONS

12 Goods and ‘Bads’ Can Get Ugly The term ‘good’ is widely used in economics and is complicated in its definition. ‘Goods’ are things that satisfy a want or need and thus have a positive value. ‘Bads’ are things that have a negative value such as garbage. Goods and Bads derive their utility from people and as such: What’s a ‘good’ for one person may not be a good for another – e.g. cigarettes. DEFINITIONS

13 Goods and ‘Bads’ Can Get Even Uglier Tangible goods are things you can touch and can be traded such as food, autos. Intangible goods are things you cannot hold but can traded such as information, expertise, video games. Services are not things and cannot be traded but do satisfy a want or need. Common goods are resources ‘owned’ by the people such as fish, timber, on crown land. Public goods are either free such as air or paid for by taxes such as schools. DEFINITIONS

14 Finished and Semi-finished products Manufacturing at its base level refers to the production of goods from raw materials for sale either as: Finished products that are made for end consumer sale as consumer goods or corporate consumer goods. Semi finished products that are produced as further inputs to other goods or to other semi-finished products. These mostly work but some types of finished products can also be used as inputs – lumber for example is bought to build with and is also made into other stuff. Sometimes it is difficult to separate raw materials from manufactured goods. DEFINITIONS

15 Capital and Consumer Goods Finished and semi finished products are further classified into: Capital goods are goods that are used in the production of other goods (e.g. conveyor belts or welding robots, even factories themselves). Consumer goods are goods that are produced for end consumption through retailers to individuals, such as food, clothing, and autos. A special class of consumer goods known as corporate consumer goods also exists, such as aircraft, ships, railway engines. DEFINITIONS

16 Durable and Non-durable Goods Consumer goods are again categorised into durable, semi-durable and non-durable goods. Durable goods are those products that are made to last and use repeatedly beyond a year, such as autos, fridges, bicycles. Semi-durable goods are those products designed to last a about a year or so and can be used repeatedly such as clothing, shoes, furniture. Non-durable goods are those designed to be consumed once and within a year, such as food, paper products, gasoline. DEFINITIONS

17 Source: Statistics Canada, CANSIM, table Chained dollars are constant dollars calculated on the basis of a two year price index rather than a one year index. 100% 30% 18% 52% 100% 46% 14% 8% 24% 100% 71% 33% 10% 6% 17% Proportional Distribution Within the Canadian Economy DEFINITIONS Household Final Consumption Expenditure: Everything a household buys. Final consumption expenditure: HFCE plus taxes, debt servicing, interest paid and received, etc.

18 Goods tangible intangible services common public FinishedSemi-Finished Capital Consumer Corporate DurableSemi-durableNon-durable DiscretionaryNon-discretionary DEFINITIONS

19 Factors of Production

20 Manufacturing Labour Raw Materials Capital Land Natural Resources Semi-finished components Process (e.g. water, power) Skilled Semi skilled Admin Process Fixed (e.g. buildings) Flexible (e.g. money) SiteSituation Factors of Production Change in space and time. Space extensive/intensive FACTORS OF PRODUCTION

21 Factors of Production Proportions will vary depending on type of manufacturing: Capital intensive – needs constant and large investments of flexible capital for raw materials and equipment. Examples are petro-chemical industries. Labour intensive – lower value added, less complex goods requiring high labour inputs due to difficulties of using machinery/robotics. Examples are the clothing and shoe industry. Raw material intensive – needs access to large, secure and constant inputs of base and process materials. Examples are iron and steel, pulp and paper. FACTORS OF PRODUCTION

22 Economic Concepts Elasticity in Supply and Demand

23 From an economic point of view, durable goods are also (mostly) those types of goods that are discretionary purchases. Non-durable goods are those that are usually non- discretionary purchases. All goods are linked to price elasticity. Price elasticity is an economic concept that refers to the degree to which demand will fluctuate with changing price, and derives from the supply demand curve relationship. Elasticity BASIC ECONOMIC CONCEPTS USED

24 Supply and Demand Curves A basic concept in economics is supply and demand and how price effects the quantity that will be supplied and demanded. Thus… Price of a product per unit Quantity of units SupplyDemand … the higher the price of a product the less that gets demanded. … the higher the price of a product the more that gets produced. BASIC ECONOMIC CONCEPTS USED Spoiler Alert!! You’ve seen this all before.

25 Supply and Demand Equilibrium When the two curves get put together we end up with an equilibrium price (quantity q will be made and bought at price p) being established by the market: the price is high enough to make it worth while for producers to produce the product and cheap enough for consumers to buy the product. Price of a product per unit Quantity of units Supply Demand p q BASIC ECONOMIC CONCEPTS USED

26 Price Elasticity The revenue earned from selling a product is affected by changes in price due to due to supply and demand relationships. But because of price elasticity demand changes differentially. But supply and demand equilibrium isn’t a single relationship – it varies depending on type of good or service When the price of a good or service changes by 1% and... …demand …it is called…and is typical of Doesn’t change Perfect inelasticityNothing really,it’stheory Changes by < 1% Inelastic Non-discretionary goods Non -durable goods Changes by 1%Unitary elasticityNothing really,it’stheory Changes by >1%Elastic Discretionary goods Durable goods Becomes infinite Perfect elasticityNothing really,it’stheory BASIC ECONOMIC CONCEPTS USED

27 Elasticity and Demand Curves Unit Change In Price Unit Change in Quantity Demanded Inelastic Unit elasticity Elastic So: As price increases or decreases by 1 unit, demand decreases or increases by less than, equal to, or more than one unit. These are inelastic, unitary elastic, elastic. Perfectly inelastic demand No change in demand no matter how price changes. Perfectly elastic demand Demand becomes infinite at the slightest price change. BASIC ECONOMIC CONCEPTS USED

28 Unit change in price Unit change in demand ∞ Inelastic ElasticUnitary Perfect inelasticity Perfect elasticity n..n Types of Elasticity TheoreticalEmpirical BASIC ECONOMIC CONCEPTS USED 1<11<1 1>11>1 1=11=1 1=01=0 1=∞1=∞

29 Inelastic Demand Elastic Demand BASIC ECONOMIC CONCEPTS USED

30 Spatial Cost Curves

31 Spatial Demand and Supply – Cost Curves Fundamental concept in economic geography. Effects of overcoming distance on costs… for producers; for consumers. Effects of population density… on demand; on revenue. Effects of changing costs and revenues on profit; on spatial margins of profitability; on trade area boundaries. SPATIAL COST CURVES AND SURFACES

32 The Basic Single Factory Spatial Cost Curve $ Space X Costs Fixed (production) cost component. Variable (transportation) cost component Costs vary over space due to transportation costs of getting product to markets or consumers to the product. Total cost = production costs + transportation costs SPATIAL COST CURVES AND SURFACES

33 $ Space X Revenues Revenues vary over space due to variable population density and thus demand, and the cost to consumer of obtaining product. Total revenue = quantity demanded X price Quantity demanded = money available – travel costs Population Density Demand The Basic Population Spatial Revenue Curve SPATIAL COST CURVES AND SURFACES

34 Spatial Implications of Variable Costs and Revenues $ Spatial margins of profitability I.E Trade Area X Costs Revenues Minimum cost location Maximum revenue location Profit Minimum costs and maximum revenues location the same. Therefore maximum profit point is the same. Space SPATIAL COST CURVES AND SURFACES

35 Spatial Implications of Variable Costs and Revenues $ Spatial margins of profitability I.E Trade Area X Costs Revenues Minimum cost location Maximum revenue location Profit Y Minimum costs and maximum revenues locations differ. Therefore, in this case, maximum profit location is at maximum revenue location. SPATIAL COST CURVES AND SURFACES

36 Spatial Implications of Variable Costs and Revenues $ SMP Costs Revenues SMP Now maximum profit point is not at the minimum cost or the maximum revenue locations. XZY Profit SPATIAL COST CURVES AND SURFACES

37 Costs Space X Trade area boundary between X and Y Y Fixed unit cost of production Variable cost of transportation The Basic Two Factory Spatial Cost Curve SPATIAL COST CURVES AND SURFACES

38 X Y The Basic Two Factory Spatial Cost Curve Plan View SPATIAL COST CURVES AND SURFACES

39 Costs Space X Trade area boundary between X and Y Y The Basic Two Factory Spatial Cost Curve With Revenue Curve v v Profit Unserved area between X and Y SPATIAL COST CURVES AND SURFACES

40 X Y The Basic Two Factory Spatial Cost Curve Plan View Unserved area between X and Y SPATIAL COST CURVES AND SURFACES

41 What Happens to Market Boundary When ‘Y’ Reduces Unit Production Costs Costs Space X Trade area boundary between X and Y Y Scale economies reduce unit costs Market area of Y increases SPATIAL COST CURVES AND SURFACES

42 X Y The Basic Two Factory Spatial Cost Curve Plan View New market boundary services un-served area. SPATIAL COST CURVES AND SURFACES

43 Costs Space X Trade area boundary between X and Y Y Scale economies reduce transport costs Market area of Y increases What Happens to Market Boundary When ‘Y’ Reduces Transportation Costs SPATIAL COST CURVES AND SURFACES

44 Adding a Revenue Curve Costs Space X Trade area boundary between X and Y Y Scale economies reduce unit costs Market area of Y increases v v Profit v Unserved area now gets served by Y SPATIAL COST CURVES AND SURFACES

45 Costs Space X Trade area boundary between X and Y Y Scale economies reduce transport costs Market area of Y increases What Happens to Market Boundary When ‘Y’ Reduces Transportation Costs v v Profit SPATIAL COST CURVES AND SURFACES

46 Costs Space X Y Cost Surfaces Cost isolines X1 X2 X3 SPATIAL COST CURVES AND SURFACES

47 X Y Cost Surfaces Cost isolines X1 X2 X3 SPATIAL COST CURVES AND SURFACES

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49 The history of industrial location theory based on developing progressively more realistic models. Each subsequent theory, more or less, builds on the preceding models; that is, it builds on the perceived weaknesses of those previous models. Traditionally, the most influential variable has been transportation and the most influential process has been distance decay. History of Industrial Location Models HISTORY AND FRAMEWORKS

50 Markets and raw material suppliers cannot be moved. Labour and capital can. So the models depend on: Locations of markets and raw materials suppliers and the cost of transportation incurred in moving raw materials and finished products between markets, suppliers, and manufacturing plant. This has been the basis of the normative (theoretical) models of industrial location. How They Work HISTORY AND FRAMEWORKS

51 Theoretical models of industrial location can be divided into two main types: Economic optimisation models that seek the single best location for a plant, where best usually meant most profit. Economic sub-optimisation models that seek those areas of profitability where the plant can make money, but not necessarily the maximum profit. Traditional models most appropriate to the location of: Basic heavy industry of the type formed early in the industrialisation process. The individual factory as the object of study. The individual entrepreneur as the decision maker. Types of Models HISTORY AND FRAMEWORKS

52 Who’s Who PersonMajor Locational Attribute of Model OPTIMISING MODELS WeberLeast cost location. PalanderLeast cost location, variable prices, leading to market areas. HooverLeast cost location with variable transportation costs. LoschMaximum profit point (variable revenues). HotellingLocational interdependence & market areas. SUB-OPTIMISING MODELS IsardLocational triangle & economic substitution. SmithMargins of profitability. SimonSatisficing. PredBehavioral matrix. Modeling of Industrial landscape starts in 1909 and all models are explicitly locational using variation in costs/revenues over space. HISTORY AND FRAMEWORKS

53 SELLING PRICE OF FINISHED PRODUCTS Uniform In SpaceNot Uniform In Space COST OF FACTORS OF PRODUCTION Uniform In Space Plants are indifferent to location Best locations are those thatmaximise sales and hence profits Not Uniform In Space Best locations are those that minimisecosts and hencemaximise profits Best locations maximisedifference between costs and revenues and hence maximiseprofits The Beckmann Framework HISTORY AND FRAMEWORKS

54 SELLING PRICE OF FINISHED PRODUCTS Uniform In SpaceNot Uniform In Space COST OF FACTORS OF PRODUCTION Uniform In Space Plants are indifferent to location Best locations are those that maximise sales and hence profits Not Uniform In Space Best locations are those that minimise costs and hence maximise profits Best locations maximise difference between costs and revenues and hence maximise profits The Beckmann Framework and Spatial Cost Curves Revenues Costs Space $ $ $ $ SPATIAL COST CURVES AND SURFACES

55 Weber’s Model

56 Alfred Weber developed this model in 1909 to explain the location of manufacturing. It has been modified greatly over the years to better suit more modern views on manufacturing location. But it still has some utility in examining the location of what are called high weight loss industries (such as the steel industry). It also serves as another good example of the normative model and the assumptions on which such models must be based. Weber's Industrial Location Theory WEBER

57 1.There are two types of raw materials: localised or point sources (which may nonetheless cover considerable areas such as timber stands) and ubiquitous sources, which are readily available throughout the system (such as water). 2.Markets are fixed point locations (but can be metropolitan areas). 3.Transportation costs are proportional to distance. 4.Transportation costs are the same on finished products as for raw materials. 5.Processing costs are constant over space (no scale economies). 6.Labour costs are constant over space. 7.Demand is constant; i.e. the producer can sell all they can produce. 8.Producers are profit maximisers. Assumptions of the Model WEBER

58 The assumptions isolate the effect of transportation costs on location while holding all other variables constant. In order to put the model into operation Weber developed several fundamental principles: The ton-miles concept. The weight loss hypothesis involving … pure, gross, and ubiquitous raw materials that uses… the material index. Isodapanes or cost surfaces. Operational Principles of the Model WEBER

59 This concept is based on the transportation assumptions and includes two elements: weight to be moved (tons) distance to be covered (miles) Hence, combined, these yield the respective ton-miles value for a given commodity/distance combination: To ship 200 tons of a raw material 10 miles to the plant gives a ton-miles value of 200*10=2000 ton-miles. Likewise, to ship 1 ton over 2000 miles would yield the same ton-miles value. Quantitatively they are same, qualitatively they are different - it is easier to ship the 200 tons 10 miles by canal than to ship the 1 ton 2000 miles by different modes of transportation. The Ton-Miles Concept WEBER

60 Given the assumptions of fixed revenue, fixed processing costs, identical transport costs, etc., then the best economic location for the plant is going to be at the least cost location. Since the only cost affecting the model is transportation cost, then the least cost location is going to be that location where transportation costs are minimised. Therefore… The best location is the one where the total ton- miles value for a plant is minimised. Ton-Miles and Best Economic Location WEBER

61 This concept is based on the different types of raw materials that exist: Localised raw materials: Found in one place so exert a locational pull and have two types: Pure localised raw materials: All raw material used in the product – e.g. cotton. Gross localised raw materials: Only part of the raw material used so it involves weight loss during the production process – e.g. iron ore. Ubiquitous raw materials: Found virtually everywhere so don’t exert a locational pull - e.g. water. The Weight Loss Hypothesis WEBER

62 To summarise: With pure localised raw materials there is little or no weight loss in processing; With gross localised raw materials there is weight loss in processing. With ubiquitous materials, there is a weight gain in processing. From this weight differential concept, and based on the transportation assumptions of the model, Weber developed the weight loss hypothesis: "The production plant is attracted towards those locations where the gross localised raw materials are procured.“ The Weight Loss Hypothesis WEBER

63 Based on the weight loss hypothesis and the ton- miles concept three basic location types can be postulated: Location at the gross raw material source This would occur when there was a large weight loss because you would minimise the ton-miles by shipping as little waste as possible. That is, it involves gross localised raw materials. Locational Types – At The Gross Material Source WEBER

64 Location at an intermediate site This includes a market or a material source or anywhere in between and would occur if there was no weight gain or weight loss. That is, if the raw material was pure localised. In practice, intermediate locations are unlikely to occur due to curvilinear transport costs and break of bulk costs. Locational Types – At An Intermediate Site WEBER

65 Location at the market This would occur when there was a large weight gain because you would minimise the ton-miles by not shipping the ubiquitous raw material. That is, it involves large quantities of a ubiquitous product. Locational Types – At the Market WEBER

66 The material index is a measure of how much weight loss is involved for a particular raw material, and is expressed as a simple ratio of the weight of localised raw material to the weight of finished product: material = weight of localised material index weight of finished product 1 ton of cotton/1 ton of cloth = MI of 1 4 tons of iron ore/1 ton of iron = MI of ton of flavouring/1 ton of beer = MI of 0.1 And interpreted these are: The Material Index WEBER

67 Pure localised raw = material index of 1.0 Location is intermediate. Gross localised raw material = material index of >1.0 Location is at the material source. Ubiquitous material = material index of <1.0 Location is at the market. Note that in the case of a product that uses a great deal of ubiquitous material, the localised material in the formula may be very small, as in the case of beer making where the product is mostly water. The ton-miles concept and weight loss hypothesis can be demonstrated with an example. The Material Index Interpretation WEBER

68 1 ton RM*10 = 10 2 tons RM*10 = 20 RM*10 = 5 1 ton FP*10km=10 COMPARE Material IndexTon-miles if plant located at materials source Ton-miles if plant located at market Pure (1:1) Gross (2:1) Ubiquitous (0.5:1)0.5 tons Given the following single material source, single market example, where would the plant be located if the materials were pure, gross, and ubiquitous? Material distance 10km Market The Material Index – Single Material and Market Only Pure locates anywhere (MI=10 vs. 10) Gross locates at the materials source (MI=10 vs. 20) Ubiquitous locates at the market (MI=10 vs. 5) WEBER

69 If the plant were located halfway between: Material km Market Pure:(1 ton RM*5)+(1 ton FP*5) = 10 ton-miles Gross:(2 ton RM*5)+(1 ton FP*5) = 15 ton-miles Ubiquitous:(0.5 ton RM*5)+(1 ton FP*5) = 7.5 ton-miles Location decisions are the same because ton-miles either increases or stays the same. Pure locates anywhere (MI=10 & 10) Gross locates at the materials source (MI=10 & 20) Ubiquitous locates at the market (MI=7.5 & 5) The Material Index – Single Material and Market Only WEBER

70 Plant at RM#1 Ton-miles = (2 rm2*10)+(1 fp*6) = 26 Plant at RM#2 Ton-miles = (3 rm1*10)+(1 fp*8) = 38 Plant at Market Ton-miles = (3 rm1*6)+(2 rm2*8) = 34 Weber’s general rule about location: If the weight of a single gross localised material exceeds the sum of all other raw materials, then that’s the least cost location. The Material Index – Multiple Materials and Markets ●● ● RM#1 3:1RM#2 2:1 MARKET 10 km 6 km 8 km WEBER

71 The Locational Polygon for Iron Ore Smelting ●● ● Reduction coal 8:1 Charcoal 2:1 Heating coal 2:1 ● ● Iron Ore 2:1 Scrap iron 1:1 WEBER So, in this case we use Weber’s Rule: =7, which is less than 8 so plant goes to reduction coal material source.

72 The Locational Polygon When no single raw material dominates, as is usually the case for products requiring many inputs, we can use the idea of the location polygon to locate the best plant site because now it will not be at either the market or materials source. It is quite possible that an intermediate site would be the lowest ton-miles point, and the problem becomes one of how to find this intermediate location. The problem looks like this: WEBER

73 The Locational Polygon for Zinc Smelting ●● ● Reduction coal 8:1 Slab zinc 4:1 Heating coal 3:1 ● ● ? Zinc concentrate 2:1 Fireclay 2:1 WEBER In this case: =11, which is more than 8 so plant goes somewhere in the middle.

74 The Locational Polygon Now it is no longer possibly to ascertain the location using the simple arithmetic of ton-miles, even though the least ton-miles point is still the optimum location. There are three ways to do find this location: Mechanically (Varignon Frame) Progressive approximation (brute strength) Mathematically with vectors WEBER

75 Varignon Frame Pulleys Weights Weights (material indices) pull pointer to optimum location. WEBER

76 ●● ● ● ● Progressive Approximation G1 G2 G3 ●● ● ● ● * * * ●● ● ● ● * * * # # # Guess 3 least cost locations within the locational polygon and calculate their material indices. Joint them up with a triangle. Guess 3 more points within the second (red) polygon. If their values are less than the original 3 then you are approximating the least cost point. Repeat until you hit the least cost point (material index values will start to increase. WEBER

77 The use of vector mathematics is complex and this section is added only for completeness; we shall not be discussing the actual mathematics of vector analysis. This method uses the mathematics of vectors to estimate numerically the actions of the Varignon Frame. The Varignon frame is based on the physical concept of the reaction of masses (the weights) acting in different directions. Vectors are used in physics to represent the movement of objects, and hence the physical movement of the Varignon frame can be estimated mathematically with vectors. Using Vector Mathematics WEBER

78 Weber also developed a tool that estimated the total cost surface, and showed how these can be used to identify the least cost transportation point. These were called isodapanes, or lines of equal transportation cost. Since we are not interested solely in either the cost of shipping raw materials to the plant, or finished product to the market, but in the total cost of shipping, what we want is a total transportation cost surface. Weber began by developing two sets of isovectures (or lines of equal transportation cost), one for shipping raw materials from the source to the plant and the other for shipping finished products from the plant to the market. Isodapanes WEBER

79 ● ● Material Market Cost of shipping raw materials from material source to anywhere on the landscape. Cost of shipping finished products to the marketplace from a plant located anywhere on the landscape. $10 $20 $30 $40 $50 $60 $70 $10 $20 $30 $40 $50 $60 $70 Constructing Isodapanes – The Isotims WEBER

80 ● ● Material Market $10 $20 $30 $40 $50 $60 $70 $10 $20 $30 $40 $50 $60 $70 Constructing Isodapanes – The Isotims ● ● ● ● ● ●● ● ● ● ● ● ●● ● ● $60 isodapane $70 isodapane $80 isodapane WEBER

81 ● ● Material Market $10 $20 $30 $40 $50 $60 $70 $10 $20 $30 $40 $50 $60 $70 Constructing Isodapanes – The Isotims ● ● ● ● ● ●● ● ● ● ● ● ●● ● ● $60 isodapane $70 isodapane $80 isodapane WEBER

82 ● ● Material Market Constructing Isodapanes ● ● ● ● ● ●● ● ● ● ● ● ●● ● ● $60 isodapane $70 isodapane $80 isodapane WEBER

83 The isodapane surface shown in the figure is a simple one, involving only one pure localised raw material source and one market. This is evident because the least cost isodapane, the $60 isodapane, is a straight line between the material source and the market - the plant can locate anywhere on that least cost line so the material must be pure localised. This is fairly unrealistic, but there are ways in which the isodapane surface can be made to simulate more realistic conditions. Isodapanes – Relaxing Assumptions WEBER

84 Gross localised raw materials. Change values on material isotims. WEBER

85 Ubiquitous raw materials. Change values on market isotims. WEBER

86 Higher transport costs on finished products than raw materials. Change values on market isotims. WEBER

87 Tapered transport costs on all products and raw materials. Consecutive widening of isotims. WEBER

88 Adding terminal handling costs on all products and raw materials. Add a handling cost to isotims at market and material source. WEBER

89 Stepped transport costs on all products and raw materials. Change function of isotims from continuous to discrete values. That is, each band becomes a zone. Y X WEBER

90 Critical Isodapane Z X Y $10 $15 Incentive offered at X and Y is $10, therefore: $25 Cost at Without Incentive With Incentive Z$10$10-$0=$10 Y$20$20-$10=$10 X$25$25-$10=$15 Without incentive Z is the least cost location. With incentive both Z and Y are least cost locations but X is still not. $20 Critical Isodapane WEBER

91 Critical Isodapanes and External Scale A B C D E Least cost locations. Critical isodapanes due to urbanisation economies within overlaps. But there is a C,D,E overlap where all three will save more because they form a larger agglomeration with attendant extra savings. A&B save B&D save A&C save C&D save C,D&E save D&E save C&E save WEBER

92 Summary of Classic Models Palander, Losch, Hoover all followed Weber and played with the effects of variable costs, revenues and profit as we saw earlier in cost curves and surfaces. All tried to find the ‘best’ location. $ X Costs Revenues Minimum cost location Maximum revenue/profit location Profit Y OTHER CLASSICAL MODELS

93 The past thirty years has seen considerable criticism of the traditional approaches to industrial location theory. Traditional models: Had a preoccupation with finding optimal locations (least cost, maximum revenue or maximum profit) when location decision making is suboptimal. Revolved around the concept of economic humans. Ignored the organisation of firm and the way in which a firm's organisational structure evolves over time. Relied on neo-classical micro economics and ignore the political economy. Critique of Classical Optimising Models OTHER CLASSICAL MODELS

94 Suboptimality refers to making location decisions that may not seek the `best' decisions from an economic perspective. Suboptimal locations are locations that do not return as much profit as is possible, but do return enough to survive. Suboptimal decision making has its roots in the concept of satisficing that was developed in the late 1950s by Herbert Simon, an administrative sciences theorist, and it is based in psychology and sociology as much as in economics. Sub-optimality and Satisficing SUB OPTIMAL MODELS

95 `Satisficing behaviour', as Simon called it, was based on his theory of bounded rationality. Bounded rationality meant that people made decisions based on the limited amounts of information, and the different abilities they had to process it. Therefore, people made decisions that were satisfactory under a given set of circumstances, as opposed to their decisions being the best, as the classical models demanded. Thus a satisficing human could replace the traditional economic human. Sub-optimality and Satisficing SUB OPTIMAL MODELS

96 But how would this work since firms still have to make a profit? "As long as capricious choice costs no more than entrepreneurial profit, it is still consistent with theory“ August Losch "We may regard freedom to indulge in suboptimal behaviour as spatially constrained.“ David Smith That is, a plant can depart from the optimum location only as far as it can make a profit. Sub-optimality and Satisficing SUB OPTIMAL MODELS

97 Spatial Margins of Profitability – David Smith $ Spatial margins of profitability I.E Trade Area X Costs Revenues Minimum cost location Maximum revenue/profit location Profit Space SUB OPTIMAL MODELS

98 Costs Space X Trade area boundary between X and Y Y The Basic Two Factory Spatial Cost Curve With Revenue Curve v v Profit Unserved area between X and Y These become the spatial margins of profitability. SUB OPTIMAL MODELS

99 X Y The Basic Two Factory Spatial Cost Curve Plan View Unserved area between X and Y based on spatial margins of profitability SUB OPTIMAL MODELS

100 Costs Space X Y How Incentives and Disincentives Work v v Profit Either subsidize non-profitable areas or tax profitable ones – or do both. Subsidies must offset revenues earned throughout the SMP. Z Subsidy Tax SUB OPTIMAL MODELS

101 Changing SMP and Changing Transportation Mode Costs Space SMP Rail When transportation mode changes SMP can change as well, opening up many more locations for plants. This happened with containerization in the 1970s. Z SMP Rail SMP Truck SMP Truck Costs of truck shipping Costs of rail shipping Revenues SUB OPTIMAL MODELS

102 ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● Changing SMP and Urbanisation Profitable locations at T1 ● Non-profitable locations at T1 ● Freeway T1 T2 T3 SMP SUB OPTIMAL MODELS

103 INTELLECTUAL ABILITY Judgment, intuition, knowledge low high low Quality and Quantity of INFORMATION Mostly poor decisions Mostly good decisions Increasingly better decisions Pred Matrix - Decision Making is Influenced by the Quality and Quantity of Information BUT… Even the smartest people with the best information can make poor decisions AND not so smart people with little information can luck out! So this is a probability of making better decisions. SUB OPTIMAL MODELS

104 Intellectual Ability low high low Quality and Quantity of Information Mostly poor decisions Mostly good decisions SMP and Pred Matrix ● ● ● ● ● ● ● ● ● ● SMP ● X ‘Max profit point X X X SUB OPTIMAL MODELS

105 Behavioral approaches moderate the assumptions of the classic models by demonstrating that optimal locations are rarely achieved. Structural theories, on the other hand, represent a clean break from those assumptions. The premise of structuralism is that the economy is driven by long term trends, that result from efforts to maximise or maintain profits (the capitalist motive), in a constantly evolving class struggle environment (Marxist perspective). Currently, these trends are manifested in the passage from what has been termed Fordism to Post Fordism. Structuralism STRUCTURALISM

106 Fordism was characterised by: Standardisation of consumer goods; Mass production techniques; Relatively high wages, that allowed... …mass consumption of produced goods; Production therefore concentrated in large industrial cities of first world nations that had the labour, demand, skill, capital to do all the above. Fordism STRUCTURALISM

107 Post Fordism was characterised by: Reduced standardisation of goods. Transfer of considerable productive capacity from developed to less developed countries. Tendency for large corporations to contract out. Loss of industrial employment. Deterioration of worker's wages and conditions. Deterioration of the economic base of, particularly, the inner city. Increased competition between labour blocs in and between cities. Furthermore, corporations have segmented the production process to take maximum advantage of the labour skill-labour cost balance provided by different countries and regions. Post Fordism STRUCTURALISM

108 The ‘division’ of labour into: Brawn work: routinized production stages locate in areas offering unskilled, cheap labour, while … Brain work: less standardised products and stages will locate in areas where a skilled labour force that expects higher wages is available. Expectations and Reactions: Low skilled developed nation labour expects high skilled wages, the result being… manufacturers shift their brawn work to areas of cheaper labour, while maintaining the brain work functions in the home nation. Results of Post Fordism STRUCTURALISM

109 Explicit in Post Fordism are these concepts: Third World industrialisation. First World deindustrialization or industrial restructuring. Internationalisation of the division of labour and the production process. Globalisation of the economy. all of which alter and are altered by: Labour/capital rates, flows and balances. Trade patterns. Political and corporate structures. The results are the post oil crisis decades of confusion and seeming chaos. Results of Post Fordism STRUCTURALISM


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