LOCATION THEORY
in economics and geography, theory concerned with the geographic location of economic activity;
it has become an integral part of economic geography, regional science, and spatial economics.
Location theory addresses the questions of what economic activities are located where and why.
The location of economic activities can be determined on a broad level such as a region
or metropolitan area, or on a narrow one such as a zone, neighborhoods, city block, or an
individual site.
Johann Heinrich von Thünen, a Prussian landowner, introduced an early theory of
agricultural location in Der isolierte Staat (1826) (The Isolated State). The Thünen model
suggests that accessibility to the market (town) can create a complete system of
agricultural land use. His model envisaged a single market surrounded by farmland, both
situated on a plain of complete physical homogeneity. Transportation costs over the plain
are related only to the distance traveled and the volume shipped. The model assumes
that farmers surrounding the market will produce crops which have the highest market
value (highest rent) that will give them the maximum net profit (the location, or land, rent).
The determining factor in the location rent will be the transportation costs. When
transportation costs are low, the location rent will be high, and vice versa. This situation
produces a rent gradient along which the location rent decreases with distance from the
market, eventually reaching zero. The Thünen model also addressed the location of
intensive versus extensive agriculture in relation to the same market. Intensive agriculture
will possess a steep gradient and will locate closer to the market than extensive
agriculture. Different crops will possess different rent gradients. Perishable crops
(vegetables and dairy products) will possess steep gradients while less perishable crops
(grains) will possess fewer steep gradients.
He had two basic models:
1. The intensity of production of a crop declines with the distance from the market. Intensity of
production is a measure of the amount of inputs per unit area of land.
2. The type of land use will vary with the distance from the market.
Von Thunen’s theory is based on certain assumptions.
These are as follows:
1. There is an ‘isolated state’ (as von Thunen called his model economy), consisting of 1 market
city and its agricultural hinterland.
2. This city is the market for surplus products from the hinterland and receives products from no
other areas.
3. The hinterland ships its surpluses to no other market except the city.
4. There is a homogeneous physical environment, including a uniform plain around the city.
5. The hinterland is inhabited by farmers who wish to maximize their profits, and who adjust
automatically to the market’s demands.
6. There is only one mode of transport – the horse and wagon (as this was 1826).
7. Transportation costs are directly proportional to distance, and are borne entirely by the farmers,
who ship all produce in a fresh state.
Von Thunen’s model examines the location of several crops in relation to the market.
The location of crops, according to Thünen, is determined by:
The Market prices, Transport cost, and the yield per hectare.
Alfred Weber, in 1909 the German location economist formulated a theory of industrial
location in his book entitled Über den Standort der Industrien (Theory of the Location of
Industries,1929). Weber’s theory, called the location triangle, sought the optimum
location to produce a good based on the fixed locations of the market and two raw material
sources, which geographically form a triangle. He sought to determine the least-cost
production location within the triangle by figuring the total costs of transporting raw
material from both sites to the production site and product from the production site to the
market. The weight of the raw materials and the final commodity are important
determinants of the transport costs and the location of production. Commodities that lose
mass during production can be transported less expensively from the production site to
the market than from the raw material site to the production site. The production site,
therefore, will be located near the raw material sources. Where there is no great loss of
mass during production, total transportation costs will be lower when located near the
market.
Once a least-transport-cost location had been established within the triangle, Weber
attempted to determine a cheap-labor alternate location. First, he plotted the variation of
transportation costs against the least-transport-cost location. Next he identified sites
around the triangle that had lower labor costs than did the least-transport-cost location. If
the transport costs were lower than the labor costs, then a cheap-
labor alternative location was determined.
According to Weber, factors affecting location of industries may be broadly classified into two
groups or categories:
1. Regional factors or primary causes of regional distribution of industry.
2. Agglomerative and deagglomerate factors or secondary causes responsible for redistribution
of industry.
According to Weber there are two general regional factors which affect ‘cost of production:
(i) Transportation cost, and
(ii) Labor costs. In fact, these two are the basic factors influencing location of industries.
Formulas given by Him:
Material Index = Weight of Localized Gross Material/ Weight of finished commodity
Labor Cost Index = Labor Cost / Weight of Product
William Alonso
(Location and Land Use: Toward a General Theory of Land Rent, 1964) built upon the
Thünen model to account for intra-urban variations in land use. He attempted to apply
accessibility requirements to the city center for various types of land use (housing,
commercial, and industry). According to his theory, each land use type has its own rent
gradient or bid rent curve. The curve sets the maximum amount of rent any land use type
will yield for a specific location. Households, commercial establishments, and industries
compete for locations according to each individual bid rent curve and their requirements
for access to the city center. All households will attempt to occupy as much land as
possible while staying within their accessibility requirements. Since land is cheaper at the
fringe of the city, households with less need for city center accessibility will locate near
the fringe; these will usually be wealthy households. Poor households require greater
accessibility to the city center and therefore will locate near the center, competing with
commercial and industrial establishments. This will tend to create a segregated land use
system, because households will not pay commercial and industrial land prices for central
locations.
The economist, and particularly Mr. Alonso, says, "We are not concerned with how these
tastes are formed, but simply with what they are. Given these tastes, the simplified family
will spend whatever money it has available in maximizing its satisfaction."' The individual
has at his disposal a certain income that he may spend as he wishes; it equals land costs,
plus commuting costs, plus all other expenditures. Mr. Alonso rightly points to the fact
that land values in American cities have boomed since World War II. Curiously, as he
states, this boom has taken place largely in the periphery of metropolitan areas, while the
center land values have increased little and, in some cases, declined. He instances
Robert Park's 2 theories on ecology of 1929, which theorized that improvements in
transportation and population growth increased the advantage of the center. Since World
War II, there has been a rapid increase in urban population, in automobile ownership, and
in income. Why then has there not been a rise in land values at the center? -and he goes
on to examine the effects of the three changes selected. This work provides a most useful
addition to the theory of land value, one that must become increasingly important if we
are to make the most of the new techniques available in the development of land.
Somebody said, some little time ago, "We know how to get from here to the moon; we
have theorized on it and we have experimented and now we have carried the experiments
into practice." We need to use this same approach in connection with the development of
the rapidly growing metropolitan areas in North America.
~Alonso, William, Location and Land Use H. S. Coblentz
David Ricardo, (born April 18/19, 1772, London, England—died September 11, 1823,
Gatcombe Park, Gloucestershire), English economist who gave systematized, classical
form to the rising science of economics in the 19th century. His laissez-faire doctrines
were typified in his Iron Law of Wages, which stated that all attempts to improve the real
income of workers were futile and that wages perforce remained near the subsistence
level.
Introduction to Ricardo
David Ricardo wasn't a trained economist like many of his contemporaries. He did attend
school, but to be a stock trader, not an economist. It wasn't until after his successful career
in the financial markets that he read Adam Smith's the Wealth of Nations and began
contemplating and writing about economics.
Ricardo was born in 1772 to a moderately wealthy family, the third in a family that would
eventually include seventeen children. His father was a successful stockbroker who, while
disowning David over his choice of a non-Jewish bride, still provided the connections
necessary for David's own successful career. After amassing his own fortune, Ricardo
passed away at the age of 51, leaving behind three of his own children.
While Ricardo's name may not be used as much as Adam Smith's in our modern
economic discussions, his ideas have had a profound impact. He published three books
in the early 1800s, and after his death, nine volumes of his letters and essays were
published. Of all his works, two of his theories stand out - economic rent and competitive
advantage.
Economic Rent
The first step in understanding economic rent is forgetting what you currently think of as
rent. Economic rent has nothing to do with the more common definition of rent, meaning
a payment in exchange for the use of something for a certain amount of time. Economic
rents the amount paid for something above that which the owner is expecting. Economic
rents exist because markets are imperfect.
For example, imagine you are interviewing for a new job and you decide you will accept
the job for $40,000 per year. The hiring manager calls, offers you the job, and then breaks
the news - they would like to offer you $45,000. Your economic rent is $5,000. It's not
profits, because it doesn't exceed costs; it exceeds your expected revenue.
In a perfect market structure with producers and consumers that have complete
information, there is no opportunity for economic rent. All parties know the true value of
each input and that's what they pay - no more, no less. But, in an imperfect market, forces
like labor unions and incomplete knowledge provide the opportunity for economic rent.
References: Britannica.com, British Economists, Harvard University study, Cambridge University
Study.
TECHNOLOGICAL INSTITUTE OF THE PHILIPPINES – QUEZON CITY
PLANNING 3
FUNDAMENTAL LOCATION THEORIES BY:
Johann Heinrich von Thünen,
Alfred Weber,
William Alonso,
David Ricardo
SUBMITTED BY: MANAUG, KATHLEEN ANN A.
SUBMITTED TO: AR. EDUARDO F. BOBER JR.
SECTION: AR42FC1
DATE: August 22, 2019
