McCann Urban and Regional Economics.pdf

IS b!?BAN ANI! REGIONAL ECONOMICS

With the points M4,M,,and M,as the spatial reference points, the new Weber optimum is G. At point G, it becomes advantageous for the firm to serve market point M,,rather than M3.This is because M, is nearer to G than M,,and @, - t&) > @, - t3d3).Therefore, the firm makes a greater profit from selling automobiles to market M,than to market M,. The firm could switch markets completely from M,to Ms.Alternatively,it could decide to supply both markets M, to M,. Under these conditions, it may be that a new optimum location of H arises, in which the firm at H buys from two supplier locations M, and M,, and sells at two market locations, M3and Ms.More complex arrangements are possible. or example, in order to guarantee sufficient supplies of steel inputs for the newly expanded automobile market of (M3+ M,),the firm may decide to continue to purchase steel from both MI and M4,as well as purchasing plastic from M,. Now we have a Weber location-production problem with M,, M,, M3, M4,and M, as spatial reference points. Once again, this will move the Weber optimum away from point H, and will also alter the inter-regional.equilibriumwage gradient. This type of geometrical arrangement, in which a firm has multiple input sources and multiple okput market locations, is the norm for firms in reality. Although our analysis here has been developed primarily with only two input source locations and one output market location, the Weber location-production arguments and the associated isodapane analysis are perfectly applicable to the case of firms with multiple input and output locations. The reason for employing the '&angular case of the two input locations and one output market location is that this particular spatial structure is simply the easiest two-dimensional model to explain. The model is designed to help us understand the advantages which geography confers on particular locations as sites for investment. A first key feature of the Weber model is therefore that it allows us to understand the factor price conditions under which other areas will become more attractive as locations for investment. Secondly, the model allows us to see location as an evolutionary process, in which changes in factor prices can engender changes in location behaviour, which themselves can change the supply linkages between suppliers, firms, and markets. Industrial location problems are inherently evolutionary in their nature as firms respond to new markets and products by changing their locations, and by changing the people they buy from and the people they sell to. All of these are spatial issues. There is one final issue relating to the Weber model which needs to be addressed. In reality, firms are constantly changing their input suppliers and output markets in response to changes in input and output market prices. From our Weber analysis, these changes will also imply that the optimum location of the firm is continuously changing, and that in order to ensure the profitability of any particular location the equilibrium inter-regionalfactor price gradient must also be conunuously changing. However, observation tells us that 6rms in reality do not move 7ery frequently, and this raises the question of the extent to which the Weber model is a useful analytical tool to describe industrial location behaviour. The reason why firms are not continuously moving is that the relocation process itself usually incurs very sip-iscant costs, such as the dismantlingof equipment,the moving of peopie, and the K i r ~ g of new staff. Part of the Oansartions mts assodaied with relo~xition are ako reiated to inforrilaticn ar~duncewinty, which are ~ G ? ~ C we S wil! dzzl w L ~ l a k r in the chapter. However, within the above framework we can easily ifcorporate I

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land; consequently, local real-estateprices will tend to increase, as w i l l local labour prices. These ircreases in the prices n f local factor inputs w i l l reduce profits, ceteris paribus, thereby reducing the attractiveness of the area as a location for the firms. This raises the question h o w long w i l l the cluster o f firms continue t o exist profitably in the area? This question o f industrial clustering is the topic of the next chapter, in which we discuss agglomeration economies, the growth of cities and urban hierarchies, and centreperiphery relationships.

Discussion questions 1

How does the location of input sources and output markets determine the location behaviour of the firm7

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To what extent are firm-locational changes dependent on the substitution characteristics of the firm's productionfunction?

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In what ways can space confer monopoly power?

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What role can location play in the competitive strategy of firms. and how are location and price strategies interrelated?

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What role do logistics costs play in determining location behaviour?

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What insights are provided for industrial location analysis by behavioural theories of firm behaviour?

Appendix 1.I Problem

The One-Dimension Location

Within the Weber framework, we can summarize the relative strength of the transportation 'pull' towards any particular input source point. If at any particular location. A(m;t,d,) > - A(m$J2) as the firm moves away from input source 1 and towards input spurce 2 (where A represents a marginal change), the firm should move towards input.source 1. This is because the marginal increase in the total transport costs for the shipment of input 1 is greater than the marginal fall in the total transport costs for the shipment of input 2. Alternatively, if A(m,t,d,) < - A(m2tJz), the firm will move closer towards input source 2. In the situation where A(m,t,d,) = A(rn2tJ2), the firm can move i i either direction, and will be indifferent between adjacent locations. Within the Weber triangle. we can imagine a sitliation where the output good is weightless, such as in the case ofthe electricity generated by a power-station which consume: inputs of coal and coke from M, and M,, respectively. ln this case, the plant will be constrainedto locate.along the line joining M, and M p Here. the location problem tain anaiysc the situntioi~where the becomes a one-dimensionalpoblem. !nihally v& . . . . . . - . 'trans~oriraresarc C o f i s h i ~ : . - . . - . . - . . . . . . Ir; this situatibn. any skaii change. dknokd bere by b,.iri the inputshipment distant?

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Chapter 3

The Spatial Structure of the Urban Economy 3.1

Introduction

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In the two previous chapters we discussed the reasons for the variations in the spatial patterns of industrial investment and activity. As we have seen, firms will locate in different areas for different reasons, and where this behaviour leads to the co-locationof firms we observe spatial concentrations of investment. In some cases, the various advantages which are sometimes assodated with spatial concentrations of such activity, give rise to the growth of both cities and also hierarchical systems of cities. As we know, individual cities can grow to be very large, and in some cases as large as some individual small countries. There will, however, be a variety of different people living within such spatial concentrations, and also there will be a variety of activities taking place within the city. This consequently brings us to the question of how such people and activities are distributed within the individual urban economy. In discussing how people and activities are distributed within the urban economy we focus on the question of urban land use. In other words, we try to explain why certain groups of people, or certain industrial activities, occu'py land at particular locations within the city economy. Observation of the behaviour of urban economies suggests that there are two key features common to all urban areas. These features are that, in general, land prices tend to fall with increasing distance from the city centre at a diminishing rate, and that the average land area occupied by each household or business activity tends to increase with increasing distance away from the city centre. Given that there is a market for land in which land is allocated according to users, in order to understand the allocation of land within the city and the relationship between location and land prices, we must therefore ask the question of how much people or firms are willing to pay in order to occupy land at any particular location. In sections 3.2 to 3.4 of this chapter we will construct a set of models, namely a von Thunen model and a bid-rent model, which are most commonly used to explain such phenomena. In the subsequent sections, these models will be contrasted with alternative explanations of the stnccture of urban land use and land prices. We begin by constructing a one-dimeniicna! model of the relaYonship between locatic? and laid-rent, bs?don the analysis oi von Thanen (1826). The VOE Tnunen mcdel