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AUGUST 21, 2019

- A group of theories which seek to explain the siting of economic activities. Various factors which
affect location are considered such as localized materials and amenity, but most weight is placed on
transport costs.
- Location theory addresses the questions of what economic activities are located where and why.
The location of economic activities can be determined on a broad level such as a region
or metropolitan area, or on a narrow one such as a zone, neighborhood, city block, or an individual


Von Thünen's Model of Land Use

The Von Thunen model of agricultural land use (also called location theory) was created by the farmer,
landowner, and amateur economist Johann Heinrich Von Thunen (1783–1850) in 1826 in a book called "The
Isolated State," but it wasn't translated into English until 1966. Von Thunen's model was created before
industrialization and is based on the following limiting assumptions:

- The city is located centrally within an "Isolated State" that is self-sufficient and has no external
- The Isolated State is surrounded by an unoccupied wilderness.
- The land of the State is completely flat and has no rivers or mountains to interrupt the terrain.
- The soil quality and climate are consistent throughout the State.
- Farmers in the Isolated State transport their own goods to market via oxcart, across the land, directly
to the central city. Therefore, there are no roads.
- Farmers act to maximize profits.

Von Thunen hypothesized that a pattern of rings around the city would develop based on land cost and
transportation cost.
- The Thünen model suggests that accessibility to the market (town) can create a complete system of
agricultural land use. His model envisaged a single market surrounded by farmland, both situated on
a plain of complete physical homogeneity. Transportation costs over the plain are related only to the
distance traveled and the volume shipped. The model assumes that farmers surrounding the market
will produce crops which have the highest market value (highest rent) that will give them the
maximum net profit (the location, or land, rent). The determining factor in the location rent will be the
transportation costs. When transportation costs are low, the location rent will be high, and vice versa.
This situation produces a rent gradient along which the location rent decreases with distance from
the market, eventually reaching zero.
- The Thünen model also addressed the location of intensive versus extensive agriculture in relation
to the same market. Intensive agriculture will possess a steep gradient and will locate closer to the
market than extensive agriculture. Different crops will possess different rent gradients. Perishable
crops (vegetables and dairy products) will possess steep gradients while less perishable crops
(grains) will possess less steep gradients

The Four Zones

In von Thünen's land-use model, he predicts that people will organize their systems of land use into four
concentric circles, radiating outwards from the city (where the markets are located and agricultural products
are actually sold). Each zone has a different character, based on the cost of land and the cost of getting the
products to the city.
The first zone, according to von Thünen, will be used to produce products that spoil quickly like fresh fruit,
vegetables, and dairy. These have to be close to market because they can't be transported very far. The land
closest to the city is most expensive, but these products also make the most money. The land in this entire
zone is, therefore, most likely to be used for produce and dairy because the expensive land demands a high-
yield product, but the low cost of transportation to market allows for expensive,
Timber and firewood would be produced for fuel and building materials. Before industrialization (and coal
power), wood was a very important fuel for heating and cooking. Wood is very heavy and difficult to transport,
so it is located as close to the city as possible.

The third zone consists of extensive field crops such as grains for bread. Because grains last longer than
dairy products and are much lighter than fuel, reducing transport costs, they can be located farther from the

Ranching is located in the final ring surrounding the central city.

Animals can be raised far from the city because they are self-
transporting. Animals can walk to the central city for sale or for


Beyond the fourth ring lies the unoccupied wilderness, which is

too great a distance from the central city for any type of
agricultural product because the amount earned for the product
doesn't justify the expenses of producing it after transportation
to the city is factored in.


In 1909 the German location economist Alfred Weber formulated a theory of industrial location in his book
entitled Über den Standort der Industrien (Theory of the Location of Industries,1929).
- Alfred Weber’s work (1909) is considered to be the foundation of modern location theories .
- Weber’s theory, called the location triangle, sought the optimum location for the production of a
good based on the fixed locations of the market and two raw material sources, which geographically
form a triangle.
- He sought to determine the least-cost production location within the triangle by figuring the total
costs of transporting raw material from both sites to the production site and product from the
production site to the market. The weight of the raw materials and the final commodity are important
determinants of the transport costs and the location of production. Commodities that lose mass
during production can be transported less expensively from the production site to the market than
from the raw material site to the production site.
- The production site, therefore, will be located near the raw material sources. Where there is no great
loss of mass during production, total transportation costs will be lower when located near the market.

According to Weber, three main factors influence industrial location; transport costs, labor costs and
agglomeration economies. Location thus imply an optimal consideration of these factors.

Weber’s location model often implies three stages; finding the least transport cost location and adjusting this
location to consider labor costs and agglomeration economies. Transportation is the most important element
of the model since other factors are considered to only have an adjustment effect. To solve this problem,
Weber uses the location triangle within which the optimal is located.

The above figure illustrates the issue of minimizing transport costs. Considering a product of w(M) tons to be
sold at market M, w(S1) and w(S2) tons of materials coming respectively from S1 and S2 are necessary. The
problem resides in finding an optimal factory location P located at the respective distances of d(M), d(S1)
and d(S2). Several methodologies can be used to solve this problem such as drawing an analogy to a system
of weights and pulleys (Varignon’s solution) or using trigonometry. Another way preferred among
geographers, particularly with GIS, is to use cost surfaces which are overlaid.
- Weber’s location theory explains well the location of heavy industries, particularly from the industrial
revolution until the mid-twentieth century (the sector that Weber was looking at). Activities having a
high level of use of raw materials tend to locate near supply sources, such as aluminum factories will
locate near energy sources (electricity) or port sites. Activities using ubiquitous raw materials, such
as water, tend to locate close to markets. To assess this issue, Weber developed a material
index which is simply the weight of the inputs divided by the weight of the final product (output). If
the material index is higher than 1, location tends to be toward material sources. If it is less than 1,
location tends to be toward the market. Contemporary developments in manufacturing, the reduction
of transport costs, global supply chains and new economic sectors (such as high technology) have
changed locational behavior substantially, involving much less consideration to Weber’s principles.
Still, these principles apply well for industries with a very high material index.

Bid Rent Theory (Alonso 1964) Bid rent/land rent theory shows how much different sectors of the economy
are prepared to pay for land. Basic assumption is that accessibility is increased with centrality and therefore
retailing is prepared to pay a high price for land in the CBD. As distance from the CBD increases availability
of land increases and it is affordable for residential and even agricultural use.
His model gives land use, rent, intensity of land use, population and employment as a function of distance to
the CBD of the city as a solution of an economic equilibrium for the market for space.
The bid-rent function is the amount that a household could pay for rent at different location (with differing
transportation costs) such that the same level of satisfaction is achieved; i.e., the household is on the same
indifference curve. This formulation allows for the possibility that different amounts of housing space could
be chosen at different locations. Also it allows for the possibility that higher income households end up
locating in the suburbs because of the relatively cost of open land space there compared with locations closer
the CBD. The bid-rent function would not have to be a straight line.
Bid-rent function theory may be formulated mathematically. Let U(x,h,T) be the utility function of a household
where h is the amount of housing space used, T is the amount of leisure time and x is the consumption of
other goods and services. The budget faced by the household is that of:
David Ricardo (1772-1823) was a classical British economist best known for his theory on wages and
profit, labor theory of value, theory of comparative advantage, and theory of rents. David Ricardo and several
other economists also simultaneously and independently discovered the law of diminishing marginal returns.
His most well-known work is the Principles of Political Economy and Taxation (1817).
Labor Theory of Value
Another of Ricardo's best-known contributions to economics was the labor theory of value. The labor theory
of values states that the value of a good could be measured by the labor that it took to produce it. The theory
stated that the cost should not be based on the compensation paid for the labor.

One example of this theory is that if a table takes two hours to make, and a chair takes one hour to make,
one table is worth two chairs, regardless of how much per hour the makers of the table and chairs were paid.

Comparative Advantages

David Ricardo developed the classical theory of comparative advantage in 1817 to explain why countries
engage in international trade even when one country's workers are more efficient at producing every single
good than workers in other countries. He demonstrated that if two countries capable of producing two
commodities engage in the free market, then each country will increase its overall consumption by exporting
the good for which it has a comparative advantage while importing the other good, provided that there exist
differences in labor productivity between both countries. Widely regarded as one of the most powerful yet
counter-intuitive insights in economics.

- Ricardo's theory implies that comparative advantage rather than absolute advantage is responsible
for much of international trade.
The Ricardian model is a general equilibrium mathematical model of international trade. Although the idea
of the Ricardian model was first presented in the Essay on Profits (a single-commodity version) and then in
the Principles (a multi-commodity version) by David Ricardo, the first mathematical Ricardian model was
published by William Whewell in 1833.The earliest test of the Ricardian model was performed by G.D.A
MacDougall, which was published in Economic Journal of 1951 and 1952. In the Ricardian model, trade
patterns depend on productivity differences.