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Locating Transfer-Oriented Firms: Minimizing Transport Costs

This chapter discusses the factors that influence the location decisions of transfer-oriented firms, focusing on minimizing transport costs. It explores the assumptions of the classic model and differentiates between resource-oriented and market-oriented firms. The principle of median location is also introduced as a strategy for cost optimization.

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Locating Transfer-Oriented Firms: Minimizing Transport Costs

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  1. Appendix Chapter 2

  2. Introduction: Transfer-Oriented Firms • Transport cost is dominant location factor • Procurement cost: Raw materials from input source to production facility • Distribution cost: Output from production site to market • Issue: Where will a transfer-oriented firm locate?

  3. Assumptions of Classic Model • Single transferable output • Single transferable input; other inputs are ubiquitous • Fixed factor proportions • Fixed prices of inputs & outputs

  4. Transfer-Oriented Firm Minimizes Transport Costs • Total revenue is the same at all locations • Input costs are the same at all locations • Minimize Procurement cost + Distribution cost • PC = wi * ti * x • DC = wo* to *(xM - x)

  5. Resource-Oriented Firms • Cost of transporting inputs large relative to cost of transporting outputs • Examples • Weight losing: Baseball bats • Inputs are perishable: canning • Inputs are bulky, fragile, or hazardous

  6. Industries Locating Close to Transportable Inputs • Soybean and vegetable oil: Nebraska, North Dakota, South Dakota • Mile and cheese: South Dakota, Nebraska, Montana • Sawmills: Arkansas, Montana, Idaho

  7. Market-Oriented Firms • Cost of transporting outputs large relative to cost of transporting inputs • Examples • Weight gaining: Bottling firm • Bulky output: Automobile assembly • Perishable output: Bakery • Hazardous output: weapons

  8. Principle of Median Location • Transport costs minimized at the median location • Median: separates destinations into two equal halves

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