Modern Urban and Regional
Economics
McCann, P. (2013). Modern Urban and Regional Economics. 2 nd Edition. Oxford: Oxford University
Press
H1: Industrial Location: the location of the firm in
theory
1. The level of output of an area depends on the total quantities of factor
inputs employed in the area.
2. The wealth of an area depends on the total payments received by those
factors.
3. Regional differences in population density and investments (interrelated)
and wages.
Traditional production factors:
- Capital
- Labour
- Land
Additional production factors:
- Entrepreneurship
- Technological development
The Weber Model
The Weber locational production model is conceptually the simplest analytical
framework for analyzing location decisions, and therefor frequently used for
discussions about firm locational behaviour. Weber assumes several assumptions
at the start of his theory:
A firm aims to maximize its profit, therefore the entrepreneur needs to be a
100% rational.
The goods being produced by the firm are physical and transportable
commodities, as would be the case for a manufacturing firm.
As presented in figure 1.1 (page 5) a firms material inputs (m1 & m2) are
combined in at a firm`s location (K) in order to produce commodity m3. K
is in this case the location where the firm can maximize its profit.
The firm is able to sell unlimited amounts of output 3 at the given output
market price.
Labour and capital inputs are freely available everywhere
Labour, capital and land are homogeneous everywhere.
Fixed coefficients of production: fixed relationship between quantities of
input for 1 single unit of output: m 3 = m1 + m2. Difference with Moses
model
With the assumptions mentioned above in mind, the next things can be
conclude:
1. The distance of any production location from the geographical fixed inputs
and outputs are the only issues which alter the relative profitability of
different locations.
2. The firms profit function can be defined as: [the sales revenue at the
location of the firm (K)] minus [the total value of the input purchases]
minus [transportation costs on both inputs and outputs].
3. The Weber Optimum Location is the location at which the total input plus
output transport costs are minimized, as the input & output prices and
weight are equal across space.
1
, 4. The optimum location of a firms is the location at which the costs of a firm
are minimalized.
5. The optimum location tends to move to the bulk/less dense input product
because of a higher transport rate for each ton/kilometer.
Due to different coefficients and density/bulkness of the inputted goods and
relative input transport costs (form the input locations or to the output location)
the concept of Weber (and optimum location) can change, as displayed in figure
1.1.
Transport rate of electricity is besides some investments in the electricity network
(booster stations ect.) zero. This results in the fact that a power plant will locate
at the m1, m2 line (input coal & coke)
The output transport costs (to the market) can be influenced by two factors
1. A more efficient production process (assumed the input ratios are the
same) will lead to more output at the production sight, higher m3, resulting
in a production sight closer to the market in order to reduce the
transportation costs.
2. In the case of two firms producing the same weight of output, from the
same weight of input (the same production functions), the producer with
the more bulky and less dense product (the bigger car) will have higher
transportation costs, and thereby have an optimum location which is closer
to the market.
In a Isodapane analysis, all locations which exhibit the same increase in the total
input + output transport costs, per unit of output, relative to the optimum
location at K* are connected, as is shown in figure 1.4. Firms will only be willing
enough to move to alternative locations as the decrease in labour and land factor
prices is greater than de increase in transportation costs for each unit of output.
Figure 1.5 (one side of the market) and figure 1.6 (two sides of the market) show
the line of locations at which the lower labour/land prices compensate the
transportation costs exactly (the equilibrium line). The lines represent the perfect
substitution as the equilibrium (line) shows the regional indifferent points for the
Weber optimum location. Within the isodapane analysis the costs of movement
for a firms are assumed to be zero.
The location behaviour of a firm is generally a dynamic process (and not a one-
shot phenomenon). Firms make incremental adjustments over time in their
production locations as well as in their input and output markets. In this ongoing
process, firms have to re-assess their location continuously.
An important point of critique in the assumptions made above, is the fact that the
relocation costs are kept at zero. This ongoing process of the quest for the
optimum location and minimization of transport/product costs can be discussed
by figure 1.7 on page 14.
1. Relocation of the production from K* to F, because of the lower labour/land
prices which more than compensate the additional transportation costs
(also known as a lower delivered price (p X + tXdX)).
2. Located at F, the firm could find new and cheaper (if the delivered price is
cheaper) input supplier (M4). This will only happen if (p4 + t4d4) < (p1 +
t1d1).
3. The substitution of input supplier could lead to a new Weber optimum (G)
4. After the second change of the production side, it might be more profitable
to focus on a new market (M5). This will only happen if (p5 + t5d5) > (p3 +
t3d3).
The Weber Model helps to understand the advantages of geography on the
location decision of firms who want/need to invest. The key features of the model
are:
2
Economics
McCann, P. (2013). Modern Urban and Regional Economics. 2 nd Edition. Oxford: Oxford University
Press
H1: Industrial Location: the location of the firm in
theory
1. The level of output of an area depends on the total quantities of factor
inputs employed in the area.
2. The wealth of an area depends on the total payments received by those
factors.
3. Regional differences in population density and investments (interrelated)
and wages.
Traditional production factors:
- Capital
- Labour
- Land
Additional production factors:
- Entrepreneurship
- Technological development
The Weber Model
The Weber locational production model is conceptually the simplest analytical
framework for analyzing location decisions, and therefor frequently used for
discussions about firm locational behaviour. Weber assumes several assumptions
at the start of his theory:
A firm aims to maximize its profit, therefore the entrepreneur needs to be a
100% rational.
The goods being produced by the firm are physical and transportable
commodities, as would be the case for a manufacturing firm.
As presented in figure 1.1 (page 5) a firms material inputs (m1 & m2) are
combined in at a firm`s location (K) in order to produce commodity m3. K
is in this case the location where the firm can maximize its profit.
The firm is able to sell unlimited amounts of output 3 at the given output
market price.
Labour and capital inputs are freely available everywhere
Labour, capital and land are homogeneous everywhere.
Fixed coefficients of production: fixed relationship between quantities of
input for 1 single unit of output: m 3 = m1 + m2. Difference with Moses
model
With the assumptions mentioned above in mind, the next things can be
conclude:
1. The distance of any production location from the geographical fixed inputs
and outputs are the only issues which alter the relative profitability of
different locations.
2. The firms profit function can be defined as: [the sales revenue at the
location of the firm (K)] minus [the total value of the input purchases]
minus [transportation costs on both inputs and outputs].
3. The Weber Optimum Location is the location at which the total input plus
output transport costs are minimized, as the input & output prices and
weight are equal across space.
1
, 4. The optimum location of a firms is the location at which the costs of a firm
are minimalized.
5. The optimum location tends to move to the bulk/less dense input product
because of a higher transport rate for each ton/kilometer.
Due to different coefficients and density/bulkness of the inputted goods and
relative input transport costs (form the input locations or to the output location)
the concept of Weber (and optimum location) can change, as displayed in figure
1.1.
Transport rate of electricity is besides some investments in the electricity network
(booster stations ect.) zero. This results in the fact that a power plant will locate
at the m1, m2 line (input coal & coke)
The output transport costs (to the market) can be influenced by two factors
1. A more efficient production process (assumed the input ratios are the
same) will lead to more output at the production sight, higher m3, resulting
in a production sight closer to the market in order to reduce the
transportation costs.
2. In the case of two firms producing the same weight of output, from the
same weight of input (the same production functions), the producer with
the more bulky and less dense product (the bigger car) will have higher
transportation costs, and thereby have an optimum location which is closer
to the market.
In a Isodapane analysis, all locations which exhibit the same increase in the total
input + output transport costs, per unit of output, relative to the optimum
location at K* are connected, as is shown in figure 1.4. Firms will only be willing
enough to move to alternative locations as the decrease in labour and land factor
prices is greater than de increase in transportation costs for each unit of output.
Figure 1.5 (one side of the market) and figure 1.6 (two sides of the market) show
the line of locations at which the lower labour/land prices compensate the
transportation costs exactly (the equilibrium line). The lines represent the perfect
substitution as the equilibrium (line) shows the regional indifferent points for the
Weber optimum location. Within the isodapane analysis the costs of movement
for a firms are assumed to be zero.
The location behaviour of a firm is generally a dynamic process (and not a one-
shot phenomenon). Firms make incremental adjustments over time in their
production locations as well as in their input and output markets. In this ongoing
process, firms have to re-assess their location continuously.
An important point of critique in the assumptions made above, is the fact that the
relocation costs are kept at zero. This ongoing process of the quest for the
optimum location and minimization of transport/product costs can be discussed
by figure 1.7 on page 14.
1. Relocation of the production from K* to F, because of the lower labour/land
prices which more than compensate the additional transportation costs
(also known as a lower delivered price (p X + tXdX)).
2. Located at F, the firm could find new and cheaper (if the delivered price is
cheaper) input supplier (M4). This will only happen if (p4 + t4d4) < (p1 +
t1d1).
3. The substitution of input supplier could lead to a new Weber optimum (G)
4. After the second change of the production side, it might be more profitable
to focus on a new market (M5). This will only happen if (p5 + t5d5) > (p3 +
t3d3).
The Weber Model helps to understand the advantages of geography on the
location decision of firms who want/need to invest. The key features of the model
are:
2
