The Least cost Theory

Explaining Where Industries Cluster

The Theory

This theory focuses on a factory owners desire to reduce cost. There are three categories of cost this focuses on, Transportation, labor, and the concept agglomeration. Transportation is considered the most important, and involves how high or low the cost will be to distribute products for consumers, based on location. Labor costs, if high can reduce profit margin for a factory, increasing the distance that you distribute raw materials from can reduce labor cost. Agglomeration is the concept of multiple industries clustered together can help each other by providing resources from the respective industries

Bulk-reducing and Bulk-Gaining industries

Bulk-reducing: More commonly are located near raw-materials for for the industry, because the raw-materials take up more room and are heavier than he finished or refined product.

Example: The lumber industry is a major industry that involves the harvesting and refinement of wood. An industry that comes from from the lumber industry is the paper industry. In order to create paper, the factories reduce the density of the wood by making small chips of wood and making a paste out of the chips and water. It is then heated and pressurized to create paper. This represents a bulk reducing industry because the ability to transport the product is much more simple and efficient than transporting the raw material needed, lumber.

Bulk-Gaining: This is an industry in which mass or volume is gained with the finished product, and is normally closer to the actually market for the industry.

Example: The kitchen appliance industry involves putting together many small electronic parts to make a much larger, and much bulkier machine, such as a dishwasher, or refrigerator, which are both heavy products created by metals, and electronics. The reason this is a bulk-gaining industry is because the products gain much Weigh and volume.