Weber's Least Cost Theory

by Daniel Uribe, Emy Flores and Addie Soucheck

What is Weber's Least cost Theory?

The least cost theory is basically companies looking for the best spot and best way to make everything cheaper. For instance companies making stuff, like auto-parts, plane parts, and other objects. They look for a place that has all their supplies near them, that are close so they could just send trucks to load it with their equipment. So they look for stores, or places with their stuff and build their buildings close to them. They also look for the cheapest labor, so they end up going to the semi- periphery and periphery countries/ locations to have cheap labor. They do this to make up for transportation costs, since they aren't losing much money on spending on the workers they can pay for other expensive stuff.

Transportation

The companies choose a location that is best fitted for them. The site is chosen based on the cost of moving raw materials to the factory and finished product to the market. Basically they look for the cheapest way of transportation. So they build close to markets, so they could just load truck full of the material and send it. Trucks are the best way, cheapest way of transport for a short distance. They are best fitted for local areas of a location, but for other modes of transportation, farther away railroads and airplanes are best suited. If its farther away the companies tend to use railroads because it will arrive faster than the trucks and its cheaper that way instead of a truck taking forever and paying more for it. Yet if its a really far away transport, they have to go with an airplane, because just like with the truck and railroads its faster and even though it may cost a lot more its faster to get.

Labor

cheap labor is what the companies are looking for, this makes up for his/hers transportation cost. For Example:

U.S.A to Mexico, factories/industries moving from U.S.A to Mexico, where transportation cost to market increase, but are more than made up by cheaper labor costs. They look for the cheapest labor to make more money and invest it on farther away transportation.

Agglomeration

several industries cluster or gather in one city so they can help each other by sharing talents, services, and facilities. Agglomeration is basically a whole bunch of different stores in one location for cheaper products. Industries look for places that are close so they can benefit their profit.


-Yet if too many cluster together it can lead to higher labor cost leading into deglomeration!

Bulk-gaining & Bulk-reducing industries role

Manufacturers try to locate their factories as close as possible to both buyers and seller


Every factory uses inputs

Inputs= materials, energy, machinery and supporting services


Bulk-Reducing industry:

An industry in which the raw materials are heavier than final product. Products decrease in size or weight during manufacturing.


-needs to be located near its source of inputs to minimize transportation costs.

Ex: copper into copper wire and steel into steel bars


Bulk-Gaining industry:

An industry whose products increase in size or weight during manufacturing.


-needs to be located near market areas to minimize transportation costs

Ex: Fabricated metals and beverage production


Bulk Reducing: A production where the import weighs more than the final product, so to reduce costs bulk reducing industries needs to locate near its source of inputs. An example of this is copper, auto-mobile industry, steel, soft-drinks and beer industries too. Basically you are taking a product and not taking anything away from it (raw material) and just distributing, selling without adding anything to it, it’s the original raw product. So that’s why copper and steel is a great example of this because it’s the original product of it. Nothing was changed to it/ added stuff to it to make it heavier or change.


Bulk Gaining: Products that makes something that gains volume or weight during production. (Finished product weighs more than the raw materials). Basically they are adding ingredients to it, and making it have something it didn’t have before originally. So the raw material isn’t just it, it is now something else because they have added something to it. Examples: soft drink bottling, obvious there has to be something added to it. It’s a glass container that is holding a liquid witch is being added to it. Then there are fabricated metals, because it’s being made to another product, usually adding weight to it to change its form.

Bulk gaining VS Bulk Reducing: We see that these are very similar examples it’s because it all depend on the development of the product. So the product could just be the raw material so its bulk reducing but if then it changes form so it’s more heavier than before its considered bulk gaining. So you really have to pay attention to this, of how the product is made to see if it’s gaining or reducing.


Relation to Least Cost Theory: For bulk reducing it’s similar because it fits in with agglomeration because they need to be close to the products. They need to be close to the places that provide the small parts that make the product so it goes in with the least cost theory because they go into the cities that have all the places close together so they don’t need to waste money on far away transportation. So this makes up for more expensive transportation cost. Tying with transportation rule, they are looking for the least expensive way in moving their goods. They want to go with the trucks, least expensive way for close transport. Then for cheap labor for these they are more likely to be machines doing this so they aren’t really paying anybody, but keeping the machines working. If they are paying people they probably aren’t paying them much because it’s a simple job that doesn’t need any special skill for it. This also is the same for bulk gaining because they too need to be close to the market to get the raw materials to be able to transform it to the end product so agglomeration is being used. Then the same with transportation and labor they use the cheapest way because they are close to it so they don’t need to be using expensive funding on it because it’s close. And its machines doing most of the work and if humans are working they are paid minimal because it’s not a skillful job so they all pay into the least cost theory.