Weber's Least Cost Theory

By Ryan Bui

What is Weber's Least Cost Theory?

This is a theory that shows the 3 main aspects that factory owner's focus on to minimize the cost.

1. The first aspect is transportation. This is the most important out of the 3 because it would be the cheapest to bring raw materials in and ship final products out.

2. The second aspect is labor. This is the second most important because if labor is expensive then that will reduce the profit that the factory will make.

3. The third aspect is agglomeration. This is the clustering of industries in an area. This is important because other industries can help each other through the products that other factories make. Which can make factories depend on each other.

Bulk-Reducing And Bulk-Gaining Industries

What is Bulk-Reducing and Bulk-Gaining industries?: These are industries that follow the first aspect of Weber's theory which is transportation.

Where if the cost of transportation of the final product is more than the cost of the transportation of the raw materials then the factory should be moved closer to the consumer rather than the producer and vice versa.

Bulk-Reducing Industries: These are the industries that would locate their factory closer to the producer. An example that the Wood Book gave us is the North American copper industry where they locate their factories closer to the raw materials because it is more difficult to transport than the final product.

Bulk-Gaining Industries- This is pretty much the reverse of the bulk-reducing industries, where factories locate themselves closer to consumer. The example that the wood book gives us is Canned food and beverage products. This is because these types of industries are dependent on the accessibility to the market. Transportation is more expensive to the consumers because of the weight added on to the product.

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Other Examples of Bulk-Gaining and Bulk-Reducing Industries

Bulk-Reducing Industry Example: Energy companies that depend on are perfect examples of a bulk-reducing industry because the closer say, an energy company is to an oil producing facility the easier it is for that company to make money. Which is why many towns and cities tend to spring up around oil. Oil is also very expensive to transport with about $5-$15 dollars a barrel depending on railroad or pipeline. This may not seem like a lot but it is when you consider that the U.S produces 9.3 million barrels of crude oil a day.

Bulk-Gaining Industry Example: The movie theater industry is a good example because it relies on placing their theaters in the most public places to ensure that they get their product (which I guess would be tickets or their concession stands) gets to the most people possible. You can't have a movie theater where no one is going to visit. The raw materials that they use wouldn't cost that much to transport.