Least Cost Theory

The way to locate the point for an industry that minimizes costs of transportation and labor by taking into account three different factors:

1) Transportation - It takes money to transport thing to a place, so Business owners look for the least expensive transportation costs, and place their industry where they can transport their goods at little cost.

2) Labor - Cheap labor may be able to make up for transportation costs, such as when an industry moves to Mexico for Cheap Labor, even though the transportation costs increase.

3) Agglomeration - The advantages when a bunch of Industries cluster together and give each other resources to make each others work easier.

Bulk-Reducing and Bulk-Gaining Industries utilize the Least Cost Theory

Bulk-Reducing Industries are industries that produce less bulky products, while taking in bulky raw materials. These industries will try to lower the cost of getting raw materials to the factory by being located near where those raw materials are produced. For example, Iron products are easier to export than the raw materials imported, so iron industries will start by iron mines, to reduce the cost. This way, they use the Transportation factor the most in the Least Cost Theory.

Bulk-gaining industries are industries that produce more bulky products, and the raw materials are. These industries also are reliant on how fresh their products are, and so will position themselves closer to the market. An example of this is most perishable food industries, where it is important that fresh goods get to markets quickly, or else they'll be worth much less. These industries also use the Transportation factor as the most important factor in the Least Cost Theory

Examples of Bulk-Reducing Industries

Bulk-Reducing Industries -

1) The coal industry produces lots of power, a product that is easily transported to many places, yet coal is hard to transport, so coal plants will be built close to coal mines, to reduce the costs of transportation.

2) The Copper industry is another example as it tries to locate its factories close to the places where copper is produced, so they can save money on transportation, since Copper products are very easy to transport, it's much more cost effective to locate near raw materials, as the raw materials are much bulkier than their products.

These industries both take into account the Transportation costs of their materials, and so they take into account the Least Cost Theory, with Transportation costs being the most important factor.

Examples of Bulk-Gaining Industries

1) The Ship Building industry builds very bulky things, ships that are much harder to transport than the parts to build them, so Ships builders will try to locate themselves in places where they can get Ships transported and sold to markets easier and faster, this is a big factor the Least Cost Theory.

2) The automobile industry is also an example as their raw materials are easier to import than their products are to export, this means that they locate their factories close to cities, so that they don't have to spend as much money shipping their cars to the market.

These also take into account the transportation cost factor of the least Cost Theory, as they these industries try to locate themselves where they have to spend as little as possible exporting their goods.