Location Theory:

The Foundation of Planning and other

Economic Theories

and Models

A Presentation for AR 433A: Planning 3

Location Theory

Location theory is concerned with the geographic location of economic activities; it addresses the questions of what economic activities are located where and why.

• It rests primarily on the assumption that agents act in their own self interest. Thus, firms choose locations that maximize their profits and individuals choose locations that maximize their utility.

• Various factors which affect location are considered such as localized materials and amenities, but most weight is placed on transport costs.

• Early location theory was concerned with agricultural land use, as modeled by von Thünen and with industrial location theory by Alfred Weber. Modern location theory has been concerned with the real individual, rather than with rational economic man reflecting the influence of behavioral geography

David Ricardo

• David Ricardo (19 April 1772 – 11 September 1823) was an English political economist, and was one of the most influential of the classical economists. His most famous work is his Principles of Political Economy and Taxation wherein he discussed his theories on labor value, RENT and comparative advantage.

• Ricardo is known for his differential rent theory based on fertility but he also gave "situation" as a possible cause of rent.

• “If all land had the same properties, if it were unlimited in quantity, and uniform in quality, no charges could be made for its use, unless where it possessed peculiar advantages of situation”.

• Economic rent: the difference between the produce obtained by the employment of two equal quantities of capital and labor

: the payment over and above what is necessary to stay in business

Johann Heinrich von Thunen

• Johann Heinrich von Thünen (24 June 1783 - 22 September 1850) was a prominent nineteenth century German economist and landowner, who in the first volume of his treatise, The Isolated State (1826), developed the first serious treatment of spatial economics, connecting it with the theory of rent first developed by David Ricardo. That is, he took the Ricardian notion of rent one step further by introducing distance and space. He is sometimes referred to as the father of location theorists.

• Postulates that transport cost depends on the distance from the market and different kinds of products. The gain from farming per unit area (locational rent) decreases with increasing distance from the market.

• Coined the term Location rent (land value), which is economic rent minus the costs associated with transporting products to market

Johann Heinrich von Thunen

L = Y(P − C) − YDF wherein…

L: Locational rent (in DM/km2)

Y: Yield (in t / km2)

P: Market price of the crop (in DM / t)

C: Production cost of the crop (in DM / t)

D: Distance from the market (in km)

F: Transport cost (in DM / t / km)

• Based on this equation he theorized that “Producers

(farmers) aim to maximize location rent by minimizing the

transportation costs of getting goods to market”.

Johann Heinrich von Thunen

• Model of Agricultural Land

• von Thünen gave a predictive model of rural development around an idealized isolated urban center, imposing several simplifications in an attempt to focus on some of the fundamental processes at work in settlement patterns and rural economic activity.

• Simplified assumptions:

• The city is located centrally within an "Isolated State."

• The Isolated State is surrounded by wilderness

• The land is completely flat and has no rivers or mountains

• Soil quality and climate are consistent

• Farmers in the Isolated State transport their own goods to market via oxcart, across land, directly to the central city. There are no roads

• Farmers behave rationally to maximize profits.

Johann Heinrich von Thunen

Johann von Heinrich

Thünen concluded that the

cultivation of a crop is only

worthwhile within certain

distances from the city:

beyond that, either the cost of

the land becomes too high,

with increasing distances

transport costs also increase,

or, if there is another product

having greater yield or lower

transport costs

Alfred Weber

• Alfred Weber (30 July 1868 – 2 May 1958) was a German economist, sociologist and theoretician of culture whose work was influential in the development of modern economic geography. He is the author of Theory of the Location of Industries, studied industrial location decisions, and built on von Thunen’s theory by considering not only the costs of getting goods to market, but also the costs of transporting material inputs to the manufacturing plant.

• Considered Transportation cost as the direct function of the weight of the item and distance shipped.

• He asserted that “all else being equal, manufacturers will locate their plants either at the market or the source of the input depending on whether or not the final product gains weight or loses weight in the manufacturing process”.

• Weber formulated a theory of industrial location in which an industry is located where the transportation costs of raw materials and final product is at a minimum (least-cost location). He gave two special cases of finding the least-cost location as described below. His model allowed for three types of locations: (1) raw materials locations, (2) a production site for final goods, and (3) a consumption center.

Weber’s Weight-Losing Case The weight of the final product is less than the weight of the raw

material going into making the product.

Fig. 1 Situation in which the processing plant is located somewhere between the source and the market. The increase in transport cost to the left of the processing plant is the cost of transporting the raw material from its source. The rise in the transportation cost to the right of the processing plant is the cost of transporting the final product. Note the line on the left of the processing plant has a steeper slope than the one on the right because the raw material is heavier than the finished good. Fig. 2 Situation if the processing plant is moved closer to the source of raw material. Note that the transport cost of the final product delivered to the market is lower than in the previous location. The optimal location of the processing plant is at source of the raw material, as shown in Fig. 3.

Weber’s Weight-Losing case

Transportation cost for the product delivered to the market will be lowest of all if the processing plant is located at the source of the raw material.

Weber’s Weight-Gaining Case The final product is heavier than the raw materials that requires

transport

The weight gaining case is illustrated in Figs. 4, 5 and 6. The optimal location of the processing plant in this case is at the market.

Weber’s Weight-Gaining case

Transportation cost

for the product

delivered to the

market will be lowest

of all if the

processing plant is

located at the

market.

Weber established that firms producing goods less bulky than the raw

materials used in their production would settle near the raw-material source.

Firms producing heavier goods would settle near their market. The firm

minimizes the weight it has to transport and, thus, its transport costs.

William Alonso • Extended the von Thünen model to

urban land uses.

• His model gives land use, rent, intensity of land use, population and employment as a function of distance to the CBD of the city as a solution of an economic equilibrium for the market for space.

• He postulated that there is an inverse relationship between transportation cost and rent such that if transportation cost is high, then the rent is low.

• He developed the "Bid-Price Curve": A set of combinations of land prices and distances among which the individual is indifferent (i.e. satisfied with the combination of land price as well as the distance at some point).

Locational determinants of commercial and

industrial use COST

- price and rent of land fall with increased distance from the CBD. wages are higher in the center - local demand for labor being greater than local supply.

- commuting costs need to be offset by higher remuneration. (transport cost more of a reflection of accessibility than distance)

- locations close to junctions, nodes and terminals are particularly favored maximizing proximity to suppliers and markets.

- decentralized shopping centers are being developed following road improvement and increased car ownership.

- modern manufacturing industry relies increasingly on heavy road vehicles for long distance transportation and incurs lower transport costs on the fringes of cities than at more central locations.

Locational determinants of commercial

and industrial use REVENUE

Retailing revenue is determined by the size of the shopping catchment area or hinterland, not just in terms of population but in terms of purchasing power. Distribution of the day-time population and points of maximum transit (where people cluster together) are also important. In the case of offices, the spatial distribution, number and size of client establishments determine revenue. Revenue is thus greatest within the CBD and so are the aggregate costs. - as distance from the center increases, revenue falls and aggregate

costs (after falling initially) rises. - this is due to the upward pull of transport costs, which are no longer offset sufficiently by economies in the use of land and labor.

- only within a fairly short distance from the CBD are commercial users able to realize high profitability.

Locational determinants of commercial

and industrial use PROFITABILITY

To maximize profits, firms need to locate where they can benefit from

both the greatest revenue and from the lowest costs.

- specialized functions and activities serving the urban market as a whole will locate centrally.

- firms requiring large sites and those attempting to reduce costs of over- concentration will be attracted to the suburbs.

- firms locating close together to benefit from complementary will incur lower costs because of external economies and enjoy higher revenue due to joint demand. > since there is a high degree of inertia, most firms find it difficult to

adjust their locations to the optimum. > a satisfactory rather than ideal location moreover is established by

zoning and land use controls.

Locational determinants of commercial and

Industrial use

A mixture of interacting influences usually explain each locational

decision.

.....as price mechanism largely decides the profitability or utility of

goods and services, it subsequently determines the location of

activity and the spatial structure of the urban area supplying these

goods and services

.....high levels of accessibility within the CBD are reflected in low

transport cost attracting greatest demand for commercial sites

.....conversely, low over-all accessibility and high transport cost

outside urban areas will attract a much lower level of demand.

.....other possible influences: changes in population, technology and

transportation, pressures from redeveloped central areas and local

and central government policy.

Locational determinants of commercial and

industrial use LOCATION

> A factor which, as propagated by the adage “location, location,

location” is considered to be the foremost determinant in the

catalyzing of the decision to purchase.

> True in the practice of conventional suburban development

> Downside being that a preexistence of excellence in location is

invariably associated with high cost of land acquisition

> Created by proximity to a desirable factor such as transportation, a

waterfront, a slope, a long vista, a pleasant climate, a popular

resort, or a desirable community

> Only method to economically achieve the value added by location

is to create it on inexpensive land through PUD.

Walter Christaller

Analyzes the size distribution and firm

composition of cities

A geographical that seeks to explain the

number, size and location of human

settlements in an urban system

Settlements simply function as ‘central

places’ providing services to surrounding

areas

Central Place Theory-W. Christaller

• Central Place Theory extends the idea to the case where there is a hierarchy of cities as well as a distinction between urban and rural areas.

• Central Place Theory is based on the idea that different types of firms have different market areas and that cities are composed of these firms.

–A market area is the area over which a firm can under price its competitors

– Size depends on the relative production costs of firms, the cost of transportation, and the level of demand

Central Place Theory-W. Christaller • A Central Place is a settlement which provides one or more services for the

population living around it.

• Simple basic services, i.e. food, household items (things that replenish frequently) are said to be low order

• Specialized services (e.g. computers, universities) are said to be of high order.

• Having a high order service implies there are low order services around it, but not vice versa.

• Settlements which provide low order services are said to be low order settlements. Settlements that provide high order services are said to be high order settlements.

• The minimum population size required to profitably maintain a service is the threshold population.

• Factors affecting a fall in the threshold population are:

1. A decrease in population

2. Change in tastes

3. Introduction of substitutes

Central Place Theory-W. Christaller

The theory consists of two basic concepts:

1) threshold--the minimum market needed to

bring a firm or city selling goods and services

into existence and to keep it in business

2) range--the average maximum distance

people will travel to purchase goods and

services

Normally, the threshold is found within the

range, as the diagram shows.

Central Place Theory-W. Christaller

Central Place Theory-W. Christaller

Central Place Theory-W. Christaller

Central Place Theory-W. Christaller

Central Place Hierarchy

Hamlets Villages Towns

Number of Places 20 9 4

Average Population 417 948 2433

Average No. of Establishments 6.9 54.4 149

Average No. of Functions 5.9 32.1 59.8

Average No. of Establishments per Functions 1.2 1.7 2.5

Central Place Theory-W. Christaller Conclusion The larger the settlements, the fewer their number

The larger a settlement, the farther away a similar size

settlement is

The Range increases as the population increases

The larger the settlement, the higher the order of its services.

Deviations to this rule are:

oTourist resorts that have a small population but large number

of functions.

oDormitory towns that have a large population but a small

number of functions

August Losch

Improved Weber’s theory by introducing the

demand factor.

He assumed that manufacturers are driven to

maximize profit by locating at the place that

maximizes the difference between revenues

and costs.

He went on to assert, however, that it is

impossible for a firm to evaluate all possible

points in order to find “the place of greatest

money profit.”

Walter Isard

Further developed the isotropic sphere by

introducing the concept of substitution into a

general synthesis of the works of Von Thunen,

Weber, and Isard.

That is, “selection of a manufacturing site from

among alternative locations can be viewed as

substituting expenditures among the various

production factors such that the best site is

chosen.”

Allen Pred

Introduced a behavioral matrix in which

the quantity and quality of information

available to a decision maker is graphed

on the y-axis and their ability to use

information is graphed on the x-axis.

In this matrix the perfect location

decision would be found at the

intersection of perfect knowledge and

ability to use that knowledge.

Michael Weber

The Impact of Uncertainty on Location,

1972. Primarily concerned with adding more

complexity into the isotropic sphere by

introducing the uncertainty principle, which

effectively dismisses the assumptions of

perfect knowledge of alternatives and

complete information.

The greater the level of uncertainty, the

greater the risk.

David Smith

Brought into question the role of profit

maximization as the sole motivator of

location decisions. When choosing

location, firms consider other factors that

are either quantifiable or unquantifiable.

End of presentation.

Thank you.