Location theory
formulated a theory of industrial location in his book
ECONOMICS AND GEOGRAPHY
WRITTEN BY: The Editors of Encyclopaedia Britannica
See Article History
Location theory, in economics and geography, theory
concerned with the geographic location of economic
activity; it has become an integral part of economic
geography, regional science, and spatial economics.
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, neighbourhood, city block,
or an individual site.
Johann Heinrich von Thünen, a Prussian landowner,
introduced an early theory of agricultural location in Der
isolierte Staat (1826) (The Isolated State). 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.
In 1909 the German location economist Alfred Weber
entitled Über den Standort der Industrien (Theory of
the Location of Industries, 1929). 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.
Once a least-transport-cost location had been
established within the triangle, Weber attempted to
determine a cheap-labour alternate location. First he
plotted the variation of transportation costs against the
least-transport-cost location. Next he identified sites
around the triangle that had lower labour costs than did
the least-transport-cost location. If the transport costs
were lower than the labour costs, then a cheap-labour
alternative location was determined.
Another major contribution to location theory was
Walter Christaller’s formulation of the central place
theory, which offered geometric explanations as to how
settlements and places are located in relation to one
another and why settlements function as hamlets,
villages, towns, or cities.
William Alonso (Location and Land Use: Toward a
General Theory of Land Rent, 1964) built upon the
Thünen model to account for intra-urban variations in
land use. He attempted to apply accessibility
requirements to the city centre for various types of land
use (housing, commercial, and industry). According to
his theory, each land use type has its own rent gradient
or bid rent curve. The curve sets the maximum amount
of rent any land use type will yield for a specific
location. Households, commercial establishments, and
industries compete for locations according to each
individual bid rent curve and their requirements for
access to the city centre. All households will attempt to
occupy as much land as possible while staying within
their accessibility requirements. Since land is cheaper at
the fringe of the city, households with less need for city
centre accessibility will locate near the fringe; these will
usually be wealthy households. Poor households
require greater accessibility to the city centre and
therefore will locate near the centre, competing with
commercial and industrial establishments. This will tend
to create a segregated land use system, because
households will not pay commercial and industrial land
prices for central locations.
The Thünen, Weber, Alonso, and Christaller models are
not the sole contributors to location theory, but they
are its foundation. These theories have been expanded
upon and refined by geographers, economists, and
regional scientists.
Alonso's Bid Rent Function Theory
In 1960 William Alonso completed his dissertation
which extended the von Thünen model to urban land
uses. 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 von Thünen model required considerable
modification to apply to residential, commercial and
indusstrial land use. In the von thünen model the bid-
rent function declined as a result of the increased
transportation costs to transport the produce of one
unit of land one additional unit of distance.
A preliminary rationalization of a bid-rent function for
a household came out of the Chicago Transportation
Study. There the results indicated that households
behaved as though they had a combined rent and
transportation budget such that if transportation cost
were higher then the amount that they would pay for
rent is lower.
A more sophicated formulation assumes that
households have preferences given by a set of
indifference curves. 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 achineved;
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.
A shift to a higher bid-rent function for a household
involves the acceptance of a lower indifference curve.
This could happen if a household found there was no
location where its bid-rent function equalled or
surpassed the market rent.
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:
px + rh = y0 + w(1-t-T)
or equivalently
px + rh + wT = y0 + w(1-t)
where t is the commuting time, w the wage rate, y 0 the
nonwage income. Given t, r and p the household
maximizes utility.
Land users all compete for the most accessible land Sector model
within the CBD. The amount they are willing to pay is
called "bid rent". The result is a pattern From Wikipedia, the free encyclopedia
of concentric rings of land use, creating the concentric
zone model. Jump to navigationJump to search
It could be assumed that, according to this theory, the
poorest houses and buildings would be on the very
outskirts of the city, as this is the only location that
they can afford to occupy. In modern times, however,
this is rarely the case, as many people prefer to trade
off the accessibility of being close to the CBD and
move to the edges of a settlement, where it is
possible to buy more land for the same amount of
money (as the bid rent theory states). Likewise, lower-
income housing trades off greater living space for
increased accessibility to employment. For this
reason, low-income housing in many North American
cities, for example, is often found in the inner city,
and high-income housing is at the edges of the
settlement.
A basic version of the Sector model
Agricultural analogy[edit]
The sector model, also known as the Hoyt model, is a
Although later used in the context of urban analysis, model of urban land use proposed in 1939 by land
though not yet using this term, the bid rent theory was
first developed in an agricultural context. One of the economist Homer Hoyt.[1] It is a modification of
first theoreticians of bid rent effects was David the concentric zone model of city development. The
Ricardo, according to whom the rent on the most benefits of the application of this model include the fact
productive land is based on its advantage over the
it allows for an outward progression of growth. As with
least productive, the competition among farmers
ensuring that the full advantages go to the landlords all simple models of such complex phenomena, its
in the form of rent. This theory was later developed validity is limited.[2]
by J. H. von Thünen, who combined it with the notion
of transport costs. His model implies that the rent at
any location is equal to the value of its product minus
production costs and transport costs. Admitting that
transportation costs are constant for all activities, this Application
will lead to a situation where activities with the highest
production costs are located near the marketplace, This model applies to numerous British cities. Also, if it
while those with low production costs are farther is turned 90 degrees counter-clockwise it fits the city
away. of Mönchengladbach reasonably accurately. This may
The concentric land-use structure thus generated be because of the age of the cities when transportation
closely resembles the urban model described above: was a key, as a general rule older cities follow the Hoyt
CBD – high residential – low residential. This model,
introduced by William Alonso, was inspired by von model and more recent cities follow the Burgess
Thünen's model.Wikipedia.org (concentric zone) model.

Limitations

The theory is based on early twentieth-century rail

transport and does not make allowances for private cars
that enable commuting from cheaper land outside city
boundaries.[3] This occurred in Calgary in the 1930s
when many near-slums were established outside the
city but close to the termini of the street car lines.
These are now incorporated into the city boundary but
are pockets of low cost housing in medium cost areas.
[2]
 The theory also does not take into account the new
concepts of edge cities and boomburbs, which began to
emerge in the 1980s, after the creation of the model.
Since its creation, the traditional Central Business
District has diminished in importance as many retail and
office buildings have moved into the suburbs.
 Physical features - physical features may restrict
or direct growth along certain wedges
 The growth of a sector can be limited
by leapfrog land.
 the theory too lacks the idea based on land
topography.
References
1. ^ Hoyt, H. (1939) The Structure and
Growth of Residential Neighborhoods in
American Cities Washington, Federal
Housing Administration
2. ^ Jump up to:a b Smith, P.J. (1962) "Calgary: A
study in urban pattern", Economic
Geography, 38(4), pp.315-329
3. ^ Rodwin, L. (1950) "The Theory of
Residential Growth and
Structure", Appraisal Journal, 18,
pp.295-317
Concentric zone model
From Wikipedia, the free encyclopedia
Jump to navigationJump to search
Key (from outside to inside)
  Commuter zone (outer ring)
  Residential zone
  Working class zone
  Zone of transition
  Factory zone
  Central business district (centre)
The concentric zone model, also known as the Burgess
model or the CCD model, is one of the earliest
theoretical models to explain urban social structures. It
was created by sociologist Ernest Burgess in 1925.[1][2]
Based on human ecology theory done by Burgess and
applied on Chicago, it was the first to give the
explanation of distribution of social groups within urban
areas. This concentric ring model depicts urban land
usage in concentric rings: the Central Business
District (or CBD) was in the middle of the model, and
the city expanded in rings with different land uses. It is
effectively an urban version of Von Thünen'sregional
land use model developed a century earlier. [3] It
influenced the later development of Homer
Hoyt's sector model (1939) and Harris and
Ullman's multiple nuclei model (1945).
The zones identified are:
1. The center with the central business district,
2. The transition zone of mixed residential and
commercial uses or the zone of transition,
3. Working class residential homes (inner
suburbs), in later decades called inner city or
zone of independent working men's home,
4. Better quality middle-class homes (outer
suburbs) or zone of better housing,
5. Commuter zone.
The model is more detailed than the traditional down-
mid-uptown divide by which downtown is the CBD,
uptown the affluent residential outer ring, and midtown
in between.
Bid rent curve
Burgess's work helped generate the bid rent curve. This
theory states that the concentric circles are based on
the amount that people will pay for the land. This value
is based on the profits that are obtainable from
maintaining a business on that land. The center of the
town will have the highest number of customers so it is
profitable for retail activities. Manufacturing will pay
slightly less for the land as they are only interested in
the accessibility for workers, 'goods in' and 'goods out'.
Residential land use will take the surrounding land.
Criticism
The model has been challenged by many contemporary
urban geographers. First, the model does not work well
with cities outside the United States, in particular with
those developed under different historical contexts.
Even in the United States, because of changes such as
advancement in transportation and information
technology and transformation in global economy, cities
are no longer organized with clear "zones" (see: Los
Angeles School of Urban Analysis).
 It describes the peculiar American geography,
where the inner city is poor while suburbs are
wealthy; the converse is the norm elsewhere.
 It assumes an isotropic plane – an even,
unchanging landscape.
 Physical features – land may restrict
growth of certain sectors; hills and
water features may make some
locations unusually desirable for
residential purposes.
 Commuter villages defy the theory, being a
distant part of the commuter zone.
 Decentralization of shops, manufacturing
industry (see Industrial suburb), and
entertainment.
 Urban regeneration and gentrification – more
expensive property can be found in formerly
'low class' housing areas.
 Many new housing estates were built on the
edges of cities in Britain.
 It does not address local urban politics and
forces of globalization.
 The model does not fit polycentric cities, for
example Stoke-on-Trent.
References
1. ^ "The Burgess Urban Land Use
Model".  people.hofstra.edu.
Retrieved  2016-09-26.
2. ^ Park, Robert E.; Burgess, Ernest W.
(1925). "The Growth of the City: An
Introduction to a Research Project".  The
City  (PDF). University of Chicago Press.
pp.  47–62.  ISBN  9780226148199.
3. ^ Jean-Paul Rodrigue, Urban Land Use
Models in Urban Land Use and
Transportation
Production Function
The economic concepts of Total Physical Product (TPP),
Average Physical Product (APP), Marginal Physical
Product (MPP), and the Stages of the Production
Function
Production Function and Stages of Production --
Applying the Concept of Diminishing Marginal
Productivity
Based on the assumptions of a goal of profit
maximization and making decisions in the short run,
combined with our understanding of diminishing
marginal productivity, the question is "what level of
input should a manager use and what level of output
should the manager produce to maximize profit."
 The answer for one business will be different
than the answer for another business.  Each
business uses a slightly different combination
of inputs to produce similar outputs.  For
Qty. of Var. Qty. of Output
Input
example, you use a different recipe and a
different combination of ingredients than I do,
but we both can produce a delicious chocolate
cake.  Seldom do businesses use identical
“recipes” to produce similar (substitutable)
products.
The relationship between the level of variable input and
level of output can be illustrated with a production
function.

. (X) . (Y or TPP)  A table of data can be used to present this

relationship. This table does not identify the
0 0 fixed inputs, but it indicates how the level of
output changes if the manager changes the
1 1 quantity of variable input used during the
production period. In this example, using 2 units
2 3 of variable input will result in producing 3 units
of output. However, using 7 units of variable
input during the production period would allow
3 6
the business to produce 28 units of output.

4 10  A graph may improve our understanding of the

concept (graph 1). The axes represent the
5 15 number of physical units used (variable input or
X) and the number of physical units produced
(output or Y).
6 21
 Total physical product (TPP) -- Quantity of
7 28 output (Y) that is produced from a firm's fixed
inputs and a specified level of variable inputs
8 36 (X).

 Production function-- illustrates the

9 43 relationship between the quantity of variable
input and the level of output.
10 49
The production function could be described as a
combination or series of enterprise analyses wherein
11 54
each point on the production function represents a
different enterprise; that is, a different recipe or
12 58
combination of fixed inputs and variable input. The
idea that the production function is a series of
13 61 enterprises is expanded on in subsequent sections.

No business operates with one variable input and one

14 63
fixed input. Instead, it may be easier to think about
fixed and variable inputs as a collection of resources.
15 64
Any resource or input that cannot be altered during the
production period would be considered part of the fixed
16 64

17 63

18 61
inputs and inputs that can be varied would be
considered variable inputs. In a farm setting during a
production season, there may not be enough time to
acquire more land, buildings, equipment or labor. These
would be fixed inputs. But there may be enough time to
borrow more capital with which to buy more fertilizer,
seed, pesticides, fuel. These would be the variable
inputs. However to simplify illustrating the concept of
diminishing marginal productivity, the examples often
assume a collection or group of fixed inputs and one
variable input.
What can we learn by looking at the data or graph?
First, as the level of variable input is increased, the
level of output:
 Increases at an increasing rate, then
 Increases at a decreasing rate, and at some
point,
 decreases.
Second, managers should not use so much variable
input that the output actually declines. In this example,
the manager would not use more than 15 units because
the 16th unit does not increase production, and using
more than 16 units actually decreases production. The
economic concept of marginal physical product can
help explain this point. (Graph 2)
Marginal physical product (MPP) is the change in the
level of output due to a change in the level of variable
input; restated, the MPP is the change in TPP for each
unit of change in quantity of variable input.
 MPP = (TPP2 - TPP1)/(X2 - X1)
 A firm will not produce in stage III because using
additional units of variable input decreases
output; that is, TPP decreases as more variable
input is used; MPP < 0.
Economic theory refers to stage III as the portion of the
production function where additional variable input
results in decreased output. Managers do not produce
in Stage III. In this situation, the boundary between
Stage II (not yet defined) and Stage III is at 15 units of
variable input.
Graph 5
Third, there is a minimum level of variable input that
the manager should use. If a manager decides to use
some of the variable input; is there a minimum quantity
of variable input the manager should use? The answer is
yes, but why is the answer yes?
Consider the example illustrated in the table. Using 1
unit of variable input will result in the production of 1
unit of output. However, using 2 units of variable input
will result in the production of 3 units of output. At the
first level of production, the variable input, on the
average produces just one unit of output. At the second
level, each unit of variable input produces 1.5 units of
output (Y/X). Thus increasing the level of input increases
that quantity of output for each unit of variable input.
Economic theory refers to quantity of output per unit of
variable input as the average physical product (APP).
Continuing the example, using 3 units of variable input
will result in an APP of 2 (6/3); this too is better than
using only 2 units of variable input.
Graph 3
As long as the APP is increasing, the manager will use
more units of the variable input. In this situation, APP
increases until the manager is using 11 units of variable
input. This is the minimum number of units of variable
input the manager will use, if the variable input is used.
Economic theory refers to the portion of the production
function where the APP is increasing as Stage I. The
boundary between Stage I and Stage II, in this example,
is 11 units of variable input. This is the level of variable
input where the APP is maximized. Managers will not
produce in Stage I because using more variable input
will increase the output for each unit of variable input.
Graph 4
Average physical product (APP) -- quantity of output
per unit of variable input.
How much output is each unit of variable input
producing?
 APP = TPP/X
 A firm will not produce in stage I because using
additional units of variable input improves the
 Qty. of Var. Qty. of Output    
Input
productivity of the variable input (the APP is
increasing as more units of variable input are . (X) . (Y or TPP) APP MPP
used).  It is not until the firm reaches stage II
(declining APP) that the answer to the question
0 0 ??  
of whether to use more variable input is
unclear.
      1
 
1 1 1  
 

        2

 
2 3 1.5  
 
      3
 

  3 6 2  

 
      4
 
4 10 2.5  
 

        5

 
5 15 3  
 
      6
 

  6 21 3.5  

 
      7
 
7 28 4  
 

      8  

 
8 36 4.5  
 
      7

9 43 4.78  

      6

10 49 4.9  

      5

11 54 4.91  

      4

12 58 4.83  
Managers will produce only in Stage II: where APP
declines if more variable input is used but MPP is still
positive; that is, TPP still increases as a result of using
more variable input.
Accordingly, the manager will produce somewhere in
Stage II; where the APP decreases if more variable input
is used, but MPP is still greater than 0.
This information still does not reveal what level of
variable input or level of output within stage II
maximizes profit – we need to convert the information
about physical units into dollars in order to determine
the profit maximizing level of input and output.
How does the business manager know the relationship
between level of output and level of variable input for
the business?
Each business is different. The relationship between
productivity (output) and the quantity of input is
different for each business. There is no information
source about this relationship. Yes, for some industries
there may be some published data on this relationship
but even in those cases, each business in the industry
has a different experience.
Bottom line -- the manager needs to track data for the
business to develop the information needed to reveal
the relationship between quantity of input and quantity
of production or output. This is one small part of
developing a business inventory.
Example to illustrate impact of technology
The quantity of output resulting from the use of the
variable input is impacted by the production technology
the business is employing. A change in the technology,
for example, an improvement in production technology,
is illustrated by an upward shift in the production
function. New technology, for example, may allow a
farmer to produce more wheat (output) from the same
acre (fixed input) and fertilizer (variable input).
Graph 29
The cost of employing the new technology is discussed
in the cost section of these web pages.
In summary --
During a production period, diminishing marginal
returns "occurs when equal increases of variable
resources are successively added to some fixed
resource; marginal physical products eventually
decline”.
Urban Structure and Growth
Esteban Rossi-Hansberg, Mark L.J. Wright
NBER Working Paper No. 11262
Issued in April 2005
NBER Program(s):Economic Fluctuations and Growth 
Most economic activity occurs in cities. This creates a
tension between local increasing returns, implied by the
existence of cities, and aggregate constant returns,
implied by balanced growth. To address this tension, we
develop a theory of economic growth in an urban
environment. We show that the urban structure is the
margin that eliminates local increasing returns to yield
constant returns to scale in the aggregate, which is
sufficient to deliver balanced growth. In a multi-sector
economy with specific factors and productivity shocks,
the same mechanism leads to a city size distribution
that is well described by a power distribution with
coefficient one: Zipf's Law. Under certain assumptions
our theory produces Zipf's Law exactly. More generally,
it produces the systematic deviations from Zipf's Law
observed in the data, including the under-
representation of small cities and the absence of very
large ones. In general, the model identifies the standard
deviation of industry productivity shocks as the key
parameter determining dispersion in the city size
distribution. We present evidence that the relationship
between the dispersion of city sizes and the variance of
productivity shocks is consistent with the data.