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Industrial Economics
Industrial Economics
Industrial Economics
Structure:
5.1 Introduction
5.5 Summary
Objectives:
Industrial location is a field of study that interests both economists and geographer,
because the location of industries is of particular importance in studying the internal
structure of regions and in many cases, guides the pattern of spatial development.
The theory of industrial location attempts to explain answers for three important
questions. They are;
And what can be the best location for a particular industry keeping in view the
resource endowments of different regions, transport network , existing demand,
potential demand etc.,
Therefore, according to him, to achieve the maximum profit, they had to minimize
cost. It follows that a rational producer would choose a location where lowest
costs were incurred. This is the reason why Weber’s approach is known as the
least cost approach to the theory of industrial location.
Weber classified the causes influencing industrial location into two
categories:
a) Regional factors
b) Secondary causes
•Agglomerating factors
•Degglomerating factors
•Transportation costs
•Labor costs
•Agglomeration
•Degglomeration costs
5.2.3. Influence of Trasportation Costs:
Weber shows the impact of transportation costs on location and then demonstrates how
labour costs and agglomeration and degglomeration may change this situation.
Assuming that transport cost is directly proportional to the distance covered and weight
carried, Weber gives his famous locational triangle as shown in fig.1
M and N are two material sources and C is the consumption centre. The entire weight of
the material from M has to traverse a distance ‘a’ and material N a distance’b’ to reach
the point of location T. the weight of the product has to move the distance C to reach the
consumption point. To determine where the location will actually lie, Weber calculates
the ratio between the weight of localized material and the weight of the product. This he
designates as the material Index. If the Index is less than one, the location is oriented
towards the consumption centre, while if the index is greater than one, the location is
material oriented.
5.2.4 Influence of labor costs:
The changes of location can take place only if the rise of cost of ton of
product which it causes is compensated, or more than compensated, by
savings of labor costs. A location can be moved from the point of minimum
transportation cost to more favorable labor location only if the savings in
the cost of labor which this new place makes possible and larger than the
additional costs of transportation which it involves.
With regard to labor deviation Weber assumes fixed labor centers, but
Dennison points out that location is not only the result but the cost of
distribution labor.
Weber assumption of fixed points of consumption does not square well with
the actual market conditions in a competitive structures.
Andreas Predohl has pointed that Weber’s theory is more a selective theory
than a deductive theory.
August Losch has criticized Weber for vomiting the demand considerations.
He says; “Weber’s solution for the problem of location proves to be incorrect
as soon as not only costs but also sales possibilities are considered. His
fundamental error consists in seeking the place of lowest cost. This is an
absurd as to consider the point of largest sales as the proper location. Every
such one sided orientation is wrong. Only search for the place of greatest
5.3 Sargent Florence’s Inductive Analysis
If the location quotient is greater than one, the region has a higher
share of the industry compared with the country as a whole and if it is
less than one, the region has a lower share than the country as a
whole.
5.3.3. Critical Appraisal:
We are aware that Weber theory concentrated only on supply and cost
considerations and leaving out demand completely. In contrary to it, Losch theory
tended to neglect supply almost to the extent that Weber had neglected demand.
In his theory, therefore, Losch tried to incorporate demand by considering the
size of the market and maintained that the best location would be that which
would command the largest market area since this would bring in the highest
sales revenue.
Brewery, which at P (see fig 1); those living there will buy PQ bottles of beer. Further
away the price is higher by the amount of the frieght and the demand consequently
shrinks. When the weight costs are PF, the total price rises to OF and the demand
shrinks to zero. Thus PF will be the “extreme sales radius” for bear. By rotating the
triangle PQF on PQ as an axis we abstained the demand cone (see fig 2) whose
volume gives the total sales of the brewery at point P and thus denotes the market
area of brewery
It is possible that other farms may also produce surplus beer which they would
like to sell in the market. As long as profits are made, new breweries will come
to be established, each brewery having a circular market area.
As the number of breweries increase the circular areas touch other but even
now the whole space is not covered, and some area remains unnerved the only
possibility by which the total area can be covered is through overlapping circles
in the former cases, firms will continue to be set up to serve the unnerved
market while in the latter, consumers in the shaded region will choose a centre
that is nearest to them and leave others. Ultimately hexagons of the shapes are
formed.
The hexagonon form is the most efficient one since among all the possibilities
of utilizing the corners; the hexogon retains the most of the advantages of the
circle.
The theory of industrial location attempts to explain answers for three important
questions. They are; Why the industries are located where they are, Why the locations
are shifted, And what can be the best location for a particular industry keeping in view
the resource endowments of different regions, transport network , existing demand,
potential demand etc.,
The first comprehensive effort at developing a theory of location was made by Alfred
Weber. Weber’s theory is to be considered as a deductive theory. And he emphasized
the cost factors in affecting the location of industry. He assumed competitive pricing (a
situation where individual firms were powerless to influence the price of their product
which was the same everywhere). Therefore, according to him, to achieve the maximum
profit, they had to minimize cost. It follows that a rational producer would choose a
location where lowest costs were incurred. This is the reason why Weber’s approach is
known as the least cost approach to the theory of industrial location.