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Least Cost Theory

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by

Patrick Leonard

on 7 February 2014

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Transcript of Least Cost Theory

Least-Cost Theory
Labor
The labor distortion: sources of lower cost labor may justify greater transport distances and become the primary determinant in production.
Three Keys Aspects
Material index
Labor
Agglomeration & deglomeration
Material Index
The ratio of the weight of localized materials used in the manufacturing of a product to the weight of the finished product.

Origins of Least-Cost
Theory
-Developed by Alfred Weber
German economist
heavily influenced by work of Wilhelm Launhardt
-Explains and predicts the locational pattern of an industry and those that surround it.
-Used to to find how an industry can locate to minimize costs and therefore maximize profits.
-There are 3 key aspects.
Limitations & Exceptions
Webber's theory did not account for the fact that there are many mobile labor forces.
He also assumes that transportation cost is directly proportional to distance.
Examples of Specific Places
The general concept of least-cost theory is that resources that are closer to its factories makes it more efficient, so a middle ground that cuts down transportation costs is more practical.
P stands for the ideal placement for a factory, as there is less distance between all four locations.
Thanks for Watching
Activities of Each Sector
Agglomeration
The event of spatial clustering, or a concentration of firms in a relatively small area.
The clustering and linkages allow individual firms to enjoy both internal and external economies.
Deglomeration
Occurs when companies and services leave because of the diseconomies of industries' excessive concentration.
Sources
In this specific diagram, S1 and S2 represent the sources for the factory. This may be any kind of sources natural resources to location of factory workers, but the main function of these sectors is to use what's in it to create the factory's product, be it lumber, cotton, or people employed by the factory.
*Primary economic activity
Obviously, one may expect each sector's activity to involve transportation to each other sector, but they each have their own specific courses of action as well.
By: Macey, Samantha, Mitchel, and Patch
Factory
The factory is where the product is assembled and prepared for transportation to the market. The business work where costs for transportation is calculated may also happen at the factory, along with the calculations for multiple other aspects of production.
*Secondary Economic Activity
Market
This is where the finished products are sent to for shipment to potential buyers.
*Tertiary Economic Activity
Agglomeration - Silicon Valley
Lincoln paper and tissue
Full transcript