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Weber’s Model

Weber’s Model. Industrial Location. Locational Model. What is a model? Simplified representative / common key features. Weber’s Model. Aim: find out the optimum location of a factory Optimum location = least cost location Assumptions isotropic surface / uniform plain

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Weber’s Model

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  1. Weber’s Model Industrial Location

  2. Locational Model • What is a model? • Simplified • representative / common key features

  3. Weber’s Model • Aim: find out the optimum location of a factory • Optimum location = least cost location • Assumptions • isotropic surface / uniform plain • different labour cost at different locations but labour is not mobile • single mode of transport and transport cost is direct proportion to distance and weight

  4. Weight of localized raw materials Weight of finished product • perfect competition(same product, same quality, same price) • entrepreneurs are economic rational (minimize cost) • resources (raw materials) • ubiquitous (everywhere) • localized (fixed) • pure (no weight change) • gross (weight loss) Material index=

  5. Procedures for finding optimum location • Stage 1 - Least Transport Cost • Stage 2 - add in Labour Saving • Stage 3 - add in Agglomeration Economies

  6. $ $ R.M. distance Market Pure raw material Situation 1 One market and Single raw material Total transport cost Distribution cost Assembly cost

  7. $ $ $ $ R.M. R.M. distance distance Market Market Weight loss material Weight gain material

  8. Market 100 km 100 km 100 km RM1 RM2 Situation 2 One market and Two raw materials Both RM1 and RM2 are localized and pure

  9. RM2 Optimum location RM3 RM1 Market The Varignon frame RM1 + RM2 + RM3 Product 2kg 3kg 0.5 kg 1 kg

  10. $30 $25 $20 Stage 2 - add in Labour Saving 2 sets of isotim assembly cost + distribution cost  Total transport cost Isodapane

  11. Stage 2 - add in Agglomeration Economies

  12. Exercise • Assembly cost • A=land (114)x$1x4 +lake (160+120)x$0.5x4 = $1016 • B=lake (120+120)x$0.5x2+land (176)x$1x4 = $944 • C=lake (120+160)x$0.5x2 + land(114)x$1x2 = 508 • M= lake (120+120)x$0.5x2+land (118)x$1x2 + land (176)x$1x4+ land(118)x$1x4 • =$1652

  13. Exercise • Distribution cost • A to M = lake (120+120)x$0.5x1+land (118)x$1x1=$238 • B to M = land (118)x$1x1=$118 • C to M = land (176)x$1x1+land(118)x$1x1=$294

  14. Exercise • Total Transport Cost • A = $1016+$238=$1254 • B = $944+$118=$1062 • C = $508+$294=$802 • M=$1652+$0=$1652

  15. Optimal Location

  16. Unrealistic assumptions Important factors neglected Criticism

  17. Unrealistic assumptions uniform plain transport cost labour mobility economic man Single market competition Important factors neglected profit diseconomies technology institutional factors behavioural factors Criticism

  18. Labour • Spatial mobility of labour • industrial mobility of labour • structure of labour cost - wages, holiday, fringe benefit, training cost • other than cost, quantity and quality

  19. Labour Intensity Ratio Scatter diagram=Scattergram shows correlation of 2 variables

  20. dependent variable Scatter Diagram a b Independent variable Best fit line Y=ax+b

  21. positive correlation

  22. Negative correlation

  23. No correlation

  24. Weber’s idea Freight rate Real world Haulage cost Terminal cost Distance Transport cost/freight rate • Structure of transport cost

  25. Freight rate Real world Distance Taper off rate Diminishing marginal transport cost

  26. $ $ R.M. distance Market Effect of Taper off rate Assembly cost Distribution cost

  27. Road/truck Rail Freight rate Water Distance Different modes of transport

  28. Comparison

  29. Break of bulk/Transhipment point • A point where there is a need to change mode of transport due to • physical reason - port • artificial - national boundaries

  30. $ $ R.M. distance Market Transhipment point Distribution cost Assembly cost

  31. Impact of technology Production technology use less amount of raw materials and/or power use of substitutes (raw materials or power) e.g. use of scrap in iron and steel industry Transport technology lower freight rate refrigeration standardization(use of containers) Automation - less labour and skilled labour

  32. Impact of Information technology • What are the uses of computers and internet in manufacturing? • Computer aided design CAD • Computer controlled production • Computer controlled logistics • getting raw materials, products to market • e-business / e-commerce • buying raw materials, sale of products • e-recruitment

  33. Impact of Information technology • Impact on getting raw materials? • Impact on seeking labour? • Impact on mobility of capital? • Impact on transportation and logistics? • Impact on market? • Impact on industrial location?

  34. Impact of information technology • Information about price and supply of raw materials is widely spread • More information for labour to seek employment • Recruitment and online interview over internet • Information on job vacancies is widely spread • Decrease the reluctance of labour to migrate to othre countries • Increases mobility of labour • Increase demand for skilled labour TNCs shift to countries with cheap labour

  35. Impact of information technology Promotion of world trade Better monitoring of investment Mobility of capital is greater Lean production method and Just-in-time production is possible Industries may be shifting away from sites closed to raw materials and power resources or nodal points of transportation as the influence of transport cost is diminishing Better flow of market information

  36. Impact of technology • Information technology • With the ease of making foreign investment, it may become more and more popular to set up new factories in other countries, especially in the less developed countries, for the sake of lowering the production cost with cheaper land and labour • Decrease the need to move industries to other countries for labour with special skills • Development of Transnational corporations / cross-border production is more common • Clustering / agglomeration of industries

  37. Locational change • Declining importance of traditional factors • relative importance of other factors rise • more flexible / footloose • importance of research and development • market / large urban centres • Cross-border production / international division of labour / TNCs

  38. Behavioural Factors • Not all decision-makers are economic rational • perception , knowledge and information • satisficers rather than optimizers • psychic income • advantages : • lower rent because of weaker competition • reduce over-concentration-pollution, etc. • provide employment to inferior areas

  39. Institutional Factors Causes Strategic reasons Economic reasons Political reasons Social reasons Ways provision of infrastructure provision of land redistribution of population

  40. Favourable terms of trade e.g. Shenzhen Special Economic Zone tax holiday / concession rate land use planning / zoning protection of local industries e.g. tariff, quota Anti-pollution laws and traffic control regulations

  41. Lean production / Just in Time

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