Location theory

economic-dictionary

Location theory is a current of economic thought that incorporates geographic location as one of the variables that determine market equilibrium.

The objective of location theory is to study how space plays a key role in the decisions of producers and consumers. This, due to the fact that the supply of a merchandise and its demand can be found in distant points, which generates costs (such as those corresponding to the freight of transport).

From this approach, several economists such as Johann Heinrich von Thünen, Alfred Weber and August Lósch, have developed their theories.

Location theory features

The characteristics of the location theory include:

  • They not only analyze the impact of transportation costs, but also the opportunity costs for travel time.
  • We can understand the above with an example. Let's imagine that a person must travel half an hour to get to the supermarket of their choice. Those thirty minutes could be used for a productive activity or, in any case, for a leisure activity that would generate satisfaction.
  • The price of a good can vary, depending on its location, having to incorporate the cost of its transfer.
  • When the product must be transported, indirect communication and information costs are generated that are part of the logistics administration. In this way, it is monitored that the merchandise reaches its destination in the appropriate conditions.
  • In some cases, it is the consumer who moves to purchase the good or service.
  • The rational thing is that consumers and producers seek to reduce transport costs when making their decisions. That is, a company will consider the distance with respect to its customers, for example, as a decision variable when choosing where it will build its new factory.
  • As transport costs have been decreasing in recent decades, thanks to technological development, the deconcentration of production has been possible. In the mid-20th century, it probably would not have been profitable for a firm to manufacture its goods on one continent to sell on another.

Location theory and agglomeration costs

Location theory is related to economies of agglomeration. This concept refers to the benefits that companies obtain by being located close to each other, and may be suppliers and customers.

Likewise, agglomeration economies also refer to the utility that being close to the final consumer generates for a company. This, due to the savings in distribution costs.

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