So Where Should We Put Our Factory?

So Where Should We
Put Our Factory?
• Fixed Costs: Costs that do not change with
the level of production. For example, you
have the cost of owning a hog building
regardless of whether the building is empty,
half full of hogs, or overflowing with hogs. A
firm that manufactures aluminum pipes has
to pay for the cost of its factory and machines
whether it makes one pipe or 1,000
•Variable costs: Those costs that vary directly
with changes in the number of things you
produce or sell (labor, transportation,
materials…) If you make more toys, you will
use more electricity, you will need more people
to work…
• Ubiquitous: available everywhere. For example,
some raw materials are available everywhere, like
water. If one had to add water to a product, like
lemonade, one wouldn’t need to worry about
finding water.
• Least Cost Theory (Weber): least cost location
theory accounted for the location of a
manufacturing plant in terms of the owner’s desire
to minimize costs: the three areas to consider as
far as costs are transportation (the biggie), labor,
and agglomeration.
•Agglomeration means a good number of enterprises
cluster together in the same area (like in a large
industrial city), and they can provide assistance to
each other by shared talents, services and facilities.
Agglomeration makes big city locations more
A whole bunch of industries
agglomerated around a power
plant – look at all the
buildings! There are cost
savings when there is
Substitution principle: This principle was used
to argue against Weber’s Least Cost Location
Theory. Weber’s model might show a location
had become unprofitable, BUT perhaps there
were variations in costs over time that still
allowed it to be profitable. For example, labor
costs may have decreased, or maybe rent went
down. The substitution principle is focused on
the substitution of a product, service or process
to another that is more efficient or beneficial in
some way while retaining the same functionality.
Used to have to use U.S. laborers, but huge
influx of migrant labor and it’s now it’s equally as
cheap ) -- substituted migrant labor for US labor
Entrepot: A term used for international trade
where goods are shipped to a center for reexport; a port where merchandise can be
imported and then exported without paying
import duties (charges). Hong Kong engages in
significant amounts of this form of trade as does
Special Economic Zones
Special economic zones are specific areas within a country in which
tax incentives and less stringent environmental regulations are
implemented to attract foreign business and investment.
•Export processing zone: Specially created legal spaces within a
country with the purpose of attracting foreign-owned factories with
economic incentives like cheaper taxes. (also “foreign trade zone”).
•Free trade zone: An area in which goods are not subject to custom’s
charges, and therefore paperwork and other costs are also avoided
(also called free port, duty free zones, free cities)
•China has free trade zones – tax concessions, permission to recruit
foreign investors, there are management strategies like those used in
capitalist countries.
Bid-rent theory: A
graph which shows the
costs of locating your place
of business. There is a
relationship between
distance from the central
business district (e.g.:
central Denver) and the
cost of renting/owning
land. The closer to the
CBD, the more the cost;
the further away from CBD,
the less the cost.
of rent
Distance from CBD
Break of Bulk Point:
A break-in-bulk point is a place where goods are
transferred from one mode of transport to another, for
example the docks where goods transfer from ship to
The freight comes in on a boat, and goes out on assorted
trucks/planes/trains… Break of bulk happens at