1. Chapter 5, continued Extensions of the Weber model Economies of Scale Vertical Integration & Vertical Disintegration Localization and Urbanization Economies Location theory: practice in reality How and why firms grow Geography of Large Corporate Organizations Economic Geography and Social Relations The Product Life Cycle Model Business Cycles and Regional Landscapes The State and Economic Geography

2. Extensions of the Weber Model Distortions of the Isotropic Plain Extension of the model from manufacturing to other industries –The long-run decrease in transport costs –The substitution of brain-power for muscle and machine power: really the changing structure of production –BUT Table 5.2 shows transport costs are significant in many lines of manufacturing

3. Transport Costs as a % of Product Price

4. Simplifying Assumptions: The Isotropic Plain The concept: equal properties in all directions: Flat, no movement barriers Transport costs proportional to distance Equal Quality Environment Population evenly spaced Identical Income Levels, Tastes, Demands Perfect Knowledge: consumers & producers Producers seek to maximize profit Scale economies exist in production

5. Economies of Scale Generic problem in mfg: How large of a market to serve? It depends in part on the existence of opportunities to exploit economies of scale. $ Quantity No scale economies AC Scale economies Scale Diseconomies

6. Returns to scale: Labor

7. Returns to Scale, 1 Factor Input Increasing Returns Diminishing Returns Negative Returns

8. Assume Labor cost is $20,000 per year per worker

9. Fixed Costs: Assume $100,000 Quantity of Output Average Cost of Capital $100K

10. Average Total Costs Total

11. Forces Underpinning Scale Economies Four Broad Forces: 1. Specialization of manpower & equipment: The division of labor - internal to a firm (detail) - among firms (social) (a) increased dexterity of workers in a given task (b) savings of time as workers move from one task to another (c) scaling capital equipment to individual tasks with the proper capacity. “Lumpiness” of capital

12. From Adam Smith, The Wealth of Nations, written in 1776

13. Forces underpinning scale economies 2. Economies of the large machine 1’ x 1’ x 1’ = 1 cubic foot volume 6 square feet surface 2’ x 2’ x 2’ = 8 cubic feet volume 24 cubic feet surface Change in volume - 8x, change in surface 4x A tube: if r = 1, Volume =  r 2, Surface =  d or volume = 3.14, surface 6.28 if r = 2, Volume = 12.56, surface = 12.56 Change in volume: 4x, change in surface 2x The “2/3 rule”

14. Forces underpinning scale economies 3. Economies of massed reserves In large scale facilities, multiples of given types of equipment lessen the chance of an entire production system being down due to equipment failure. 4. Economies of large scale purchasing forward & backward ripple effects from volume lowered shipping costs

15. LRAC Alternatives (Need to look at revenue as well)

16. Vertical Integration & Vertical Disintegration; Diversification The make or buy decision Consideration of transactions costs Changes in products & processes Horizontal integration – increasing ownership concentration in an industry Diversification – spreading risks Movie industry as a classic case of vertical disintegration

17. Agglomeration

19. Advertising Agencies in Manhattan, 1976 and 1996, see Fig. 5.11 in text

22. 1860

23. 19011951

24. Asthabula Ohio Industrial Complex Electro Met Co Div. Of U.C.C. Linde Air Prod. Div. Of U.C.C. Archer-Daniels Midland Detrex Chemical Industries U.S. Indust. Chem Div. Nat.Distillers Electro Met. Co. Titanium Plant General Time & Rubber Stauffer Chem. Co. U.S. Industrial Chem. Titanium-Zirconium Ferro alloys Salt Chlorinated Solvents Oxygen Fatty Alcohols Fats Oils TiCl 4 Titanium Metal Titanium & Zirconium Metals Titanium & Zirconium Ores Polyvinyl Resins Ores & Lime

25. Localization Versus Urbanization Economies

26. ? Optimal Size for Agglomerations (Cities)? Population 1K10K100K1,000K Education economies Transportation economies Power Economies Annual Net Economies Labor economies Total Economies