Cities develop around

the concentrations of
employment generated
by firms.
Location
decision of
firms play a role
in the location
of cities
Location decisions
of firms
Industrial Firms Commercial Firms

Trading firms that

Process raw collect goods from
materials and suppliers and
intermediate inputs distribute goods to
into outputs consumers
*Trading cities
 Industrial Firms

Transfer-oriented firms Input-oriented firms

Transport Local input

costs costs
TRANSFER-ORIENTED
INDUSTRIAL FIRMS
Transfer-oriented firms

Transport
costs
Goal of Maximize
a firm? Profits
Choose location that minimizes
total transport costs (PC+DC)
Assumptions of the model:
1. Single output
2. Single transferable input
3. Fixed-factor proportions
4. Fixed prices

The only costs that vary across space are

procurement cost and distribution costs.
 Low Low
procurement distribution
cost cost
 Resource- Market-
oriented firms oriented firms
𝑚𝑜𝑛𝑒𝑡𝑎𝑟𝑦 𝑤𝑒𝑖𝑔ℎ𝑡
= 𝑝ℎ𝑦𝑠𝑖𝑐𝑎𝑙 𝑤𝑒𝑖𝑔ℎ𝑡 𝑥 𝑡𝑟𝑎𝑛𝑠𝑝𝑜𝑟𝑡𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒

Monetary weight of transferable input exceeds

the monetary weight of the output

Resource- Output is lighter than the input

oriented firm
Weight-losing activity

>
Cost of Cost of
transporting transporting
the input the finished
output
 Total Transport Costs for a Resource-Oriented Firm

Market

Forest
 Total Transport Costs for a Resource-Oriented Firm

𝑃𝐶 = 𝑤𝑖 ∗ 𝑡𝑖 ∗ 𝑥

Forest
 Slope of the PC curve

𝑃𝐶 = 𝑤𝑖 ∗ 𝑡𝑖 ∗ 𝑥

PC = Procurement cost
𝑤𝑖 = monetary weight of the input
𝑡𝑖 = distance between forest and factory
X = distance from the forest to the factory
 Total Transport Costs for a Resource-Oriented Firm

𝑤 100
𝑖= =10
10

Forest
Total Transport Costs for a Resource-Oriented Firm

𝐷𝐶 = 𝑤𝑜 ∗ 𝑡𝑜 ∗ (𝑥𝑚 -x)

Market
 Slope of the DC curve

𝐷𝐶 = 𝑤𝑜 ∗ 𝑡𝑜 ∗ (𝑥𝑚 -x)

DC = Distribution cost
𝑤𝑜 = monetary weight of the output
𝑡0 = distance between forest and factory
X = distance from the forest to the factory
Total Transport Costs for a Resource-Oriented Firm

𝑤 60
𝑜= =6
10

Market
If the firm moves one mile away from the
forest toward the market, the distribution
costs decreases by $6 but procurement
costs increases by $10

Total cost increases by $4

𝑤𝑖 = 10 > 𝑤0 = 6
 >
Monetary Monetary
weight of weight of
the input the output

It is heavier to transport the input

relative to the finished output
However..
Other resource-oriented firms do
not base their location decisions
because their inputs are heavier
than the outputs

The input is more expensive to ship

than the output because it is more
bulky, perishable, fragile, or hazardous
 >
Unit cost of Unit cost of
shipping the shipping the
input output

It is more expensive to transport the input

relative to the finished output; more fragile,
perishable, bulky or hazardous input
Transferable input is more costly
to ship than the finished output.

Where will the firm locate?

Near its input source.
𝑚𝑜𝑛𝑒𝑡𝑎𝑟𝑦 𝑤𝑒𝑖𝑔ℎ𝑡
= 𝑝ℎ𝑦𝑠𝑖𝑐𝑎𝑙 𝑤𝑒𝑖𝑔ℎ𝑡 𝑥 𝑡𝑟𝑎𝑛𝑠𝑝𝑜𝑟𝑡𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒

Monetary weight of transferable output

exceeds the monetary weight of the input

Input is lighter than the output Market-

oriented firm
Weight-gaining activity

>
Cost of Cost of
transporting transporting
the finished the input
output
 Total Transport Costs for a Market-Oriented Firm

Market

Forest
 >
Monetary Monetary
weight of weight of
the output the input

It is heavier to transport the finished

output relative to the input
 >
Unit cost of Unit cost of
shipping the shipping the
output input
It is more expensive to transport the finished
output relative to the input; more fragile,
perishable, bulky or hazardous output
Finished output is more costly to
ship than the transferable input.

Where will the firm locate?

Near its market.
Indifference
1. Monetary weight of the input is equal
to the monetary weight of the output.
2. Unit transport costs are independent
of the distance shipped.
Elimination of
Intermediate Location
By using the scale economies in transportation

Terminal costs – cost of loading and unloading

the goods and the costs of paperwork for the
shipment.

Line-haul economies– reflects efficiencies from

using different modes.
 The higher the cost of
shipping inputs or
outputs to a particular
location, the greater the
pull toward that
location.
Where will industrial
firms with single input
and market locate?
Principle of Median Location
Location decisions of firms with several
input sources and markets.
 Location Choice with
Multiple Markets
1. Ubiquitous inputs
2. Consumers
3. Delivery costs
Choose the location that minimizes total
delivery costs.
Transhipment Points and
Port Cities
Input source or market?

Port location is efficient because it

provides a central collection point
for the firm’s input
 Median Transport Location
Input source – resource-based city
Center of the region – regional center
Transhipment point – port city
Existing city – the city will grow
 FIRMS ORIENTED
TOWARD LOCAL INPUTS
Local inputs
Those inputs that cannot be efficiently
transported from one location to another
 ENERGY
INPUTS

Energy-intensive firm is pulled toward a site

with inexpensive energy
 LABOR

Labor-intensive firm is pulled toward a site with

inexpensive labor
SEVERAL INPUTS
Measure the differences
(costs and price)
AMENITIES
ORIENTATION
Firms are indirectly attracted to sites that
provide amenities such as good weather, high-
quality schools, low crime rates, clean
environment, cultural opportunities
Firm’s location choice depends on the location
choice of its workforce
Firms follow workers
LOCAL PUBLIC
SERVICES AND TAXES
Public sector provides some of the inputs used
directly by firms and provide goods consumed
by the city’s workforce
Public sector also affects the location
decisions of businesses through tax policies
SUMMARY?