Location Theory:

The Foundation of Planning and other

Economic Theories and Models
Lecture Presentation for Planning 3
Reading Activity Guide
 The search for a utopian society is unending. Ebenezer Howard,
Frank Lloyd Wright and Le Corbusier are 3 of the most well-
known utopian visionaries of the 20th century. From the reading:
 Define the conditions and/or scenarios where they draw their
inspirations to put forth their concepts (Garden City, Broadacre
City and Radiant City) of a utopian urban society. Why are these
conditions so compelling that it needs to addressed the way they
presented them?
 What are the distinguishing features of their perfect urban society?
 In this modern period, which of these concepts’ features can be
used or work and why do we need to bring them into reality?
 Maximun of 3-pages; minimum of 2-pages (encoded/handwritten)
 Due for submission on 19th February 2019.
 Midterm/prelim exam is also on 19th February 2019.
Intended Learning Outcomes (ILOs)
Understand the economic (location)
factors that influence and/or contribute
to the development of urban planning
theories, concepts, & approaches.
Relate the economic (location) theories
in the planning process, and the resulting
urban forms.
 Location Theory
Location theory is concerned with the geographic location of
economic activities; it addresses the questions of what
economic activities are located where and why.
• Various factors which affect location are considered such as
localized materials and amenities, but most weight is placed on
transport costs.
• Thus, the search for locational advantages are held by the primary
assumption: Agents act in their own self interest.
• Firms choose locations that maximize their profits
• Minimized production cost
• Minimized transportation cost
• Maximized sales revenue
• Individuals choose locations that maximize their utility
• Quality of the product
 Location Theory
FACTORS INFLUENCING CHOICE OF LOCATION
1. Market - access to high population concentration for market or product.
 What are important considerations?
 What are some of the disadvantages?
2. Production Cost - inputs
• Labor (cost, availability, productivity)
• Energy
• Materials
3. Access to, and cost of capital
4. Other factors (tax considerations, community
development, and local amenities)
5. Agglomeration economies
 What are examples of this type?
6. Environmental Factors
 Location Theory
MAJOR FACTORS IN LOCATION
SEARCHES
1. Access to Markets/Distribution
Centers
Ability to compete & penetrate local &
regional markets
 Cost of serving local & regional markets
 Demographics
 Relative location to local & regional markets
 Trends in sales by geographic area
2. Labor
Ability to attract & retain skilled labor component
 Changing labor market conditions
 Extent & militancy of labor unions in the area
 Labor migration trends
 Labor productivity & productivity trends
 Prevailing wage rates
 Skill levels available
 Location Theory
MAJOR FACTORS IN LOCATION
SEARCHES
3. Access to Supplies/Resources &
Raw Materials
 Agglomeration, urbanization & network econ
 Cost and movement of transporting supplies
& people between facilities
 Trends in suppliers by area
4. Site Characteristics
 Site area & layout of physical structures
 Construction/remodeling cost & insurance
premiums
 Current conditions
 Future resale value of site & structure/s
 Market price of site & structure/s
 Location Theory
MAJOR FACTORS IN LOCATION
SEARCHES
5. Community/Government Aspects
Ambiance and Quality of Life
 Business climate; Cost of Living
 Housing availability & price
 Quality of schools, cultural & recreation
programs and facilities
 Political stability of location & regions
6. Competitive considerations
 Existing trade barriers and laws
 Expectations regarding reactions of
competitors to new site
 Internalized economies of scale in relation to
the size & scale of operation
 Localization economies
 Type & location of new competitors
 Location Theory
MAJOR FACTORS IN LOCATION
SEARCHES
7. Environmental Considerations
Existing laws, rules of conduct, and government
regulations pertaining to the environment
 Cost of compliance (out of pocket expenses
for pollution control, equipment production,
process changes, etc)
 Imposition of cost associated with future
regulations
8. Taxes and financing
 Property & other local taxes; income tax
 Tax breaks, incentives, concessions
9. Utilities & services
Availability, quality & price of water, power,
sewage, gas, etc
 Quality of roads, police & fire protection,
medical facilities and other services
 LOCATIONAL DETERMINANTS: Commercial
and Industrial use
A mixture of interacting influences usually explain each locational
decision.
.....as price mechanism largely decides the profitability or utility of
goods and services, it subsequently determines the location of
activity and the spatial structure of the urban area supplying these
goods and services
.....high levels of accessibility within the CBD are reflected in low
transport cost attracting greatest demand for commercial sites
.....conversely, low over-all accessibility and high transport cost
outside urban areas will attract a much lower level of demand.
.....other possible influences: changes in population, technology and
transportation, pressures from redeveloped central areas and local
and central government policy.
 LOCATIONAL DETERMINANTS: Commercial
and Industrial use
 LOCATION

> A factor which, as propagated by the adage “location, location,

location” is considered to be the foremost determinant in the
catalyzing of the decision to purchase.
> True in the practice of conventional suburban development
> Downside being that a preexistence of excellence in location is
invariably associated with high cost of land acquisition
> Created by proximity to a desirable factor such as transportation, a
waterfront, a slope, a long vista, a pleasant climate, a popular
resort, or a desirable community
> Only method to economically achieve the value added by location
is to create it on inexpensive land through PUD.
 LOCATIONAL DETERMINANTS: Commercial
and Industrial use
 PROFITABILITY
TO MAXIMIZE PROFITS, firms need to locate where they can benefit from
both the greatest revenue and from the lowest costs.
- specialized functions and activities serving the urban market as a whole will locate
centrally.
- firms requiring large sites and those attempting to reduce costs of over-
concentration will be attracted to the suburbs.

- firms locating close together to benefit from complementary will incur lower costs
because of external economies and enjoy higher revenue due to joint demand.
> since there is a high degree of inertia, most firms find it difficult to
adjust their locations to the optimum.
> a satisfactory rather than ideal location moreover is established by
zoning and land use controls.
 LOCATIONAL DETERMINANTS: Commercial
and industrial use
 COST
- price and rent of land fall with increased distance from the CBD.
- wages are higher in the center
- local demand for labor being greater than local supply.
- commuting costs need to be offset by higher remuneration (transport
cost more of a reflection of accessibility than distance)
- locations close to junctions, nodes and terminals are particularly
favored maximizing proximity to suppliers and markets.
- decentralized shopping centers are being developed following road
improvement and increased car ownership.
- modern manufacturing industry relies increasingly on heavy road
vehicles for long distance transportation and incurs lower transport
costs on the fringes of cities than at more central locations.
 LOCATIONAL DETERMINANTS: Commercial
and industrial use
 REVENUE
 Retailing revenue is determined by the size of the shopping catchment area or
hinterland, not just in terms of population but in terms of purchasing power
 Distribution of the day-time population and points of maximum transit (where
people cluster together) are also important.

 In the case of offices, the spatial distribution, number and size of client
establishments determine revenue.
Revenue is thus greatest within the CBD and so are the aggregate costs.
- as distance from the center increases, revenue falls and aggregate
costs (after falling initially) rises - this is due to the upward pull of
transport costs, which are no longer offset sufficiently by
economies in the use of land and labor.
- only within a fairly short distance from the CBD are commercial
users able to realize high profitability.
Early Location Theories and
Central Place Theory
 Location Theory
• Early location theory was concerned with agricultural land use,
as modeled by Johann von Thünen and with industrial location
theory by Alfred Weber.
• Modern location theory has been concerned with the real
individual, rather than with rational economic man reflecting the
influence of behavioral geography.
• David Ricardo is known for his differential rent theory based on
fertility but he also gave "situation" as a possible cause of rent.
• William Alonso extended the von Thünen model to urban land
uses. His model gives land use, rent, intensity of land use,
population & employment as a function of distance to the CBD.
 David Ricardo
• David Ricardo (19 April 1772 – 11 September 1823) was an English
political economist, and was one of the most influential of the classical
economists. His most famous work is his Principles of Political Economy
and Taxation wherein he discussed his theories on labor value, RENT and
comparative advantage.

• Ricardo is known for his differential rent theory based on fertility but he also
gave "situation" as a possible cause of rent.

• “If all land had the same properties, if it were unlimited in quantity, and
uniform in quality, no charges could be made for its use, unless where it
possessed peculiar advantages of situation”.

• Economic rent: the difference between the produce obtained by the

employment of two equal quantities of capital and labor
: the payment over and above what is necessary to stay in business
Johann Heinrich von Thunen
• Johann Heinrich von Thünen (24 June 1783 - 22 September
1850) was a prominent nineteenth century German economist and
landowner, who in the first volume of his treatise, The Isolated State
(1826), developed the first serious treatment of spatial economics,
connecting it with the theory of rent first developed by David
Ricardo. That is, he took the Ricardian notion of rent one step further
by introducing distance and space. He is sometimes referred to as
the father of location theorists.

• Postulates that transport cost depends on the distance from the

market and different kinds of products. The gain from farming per
unit area (locational rent) decreases with increasing distance from
the market.

• Coined the term Location rent (land value), which is economic rent
minus the costs associated with transporting products to market
Johann Heinrich von Thunen
L = Y(P − C) − YDF wherein…
L: Locational rent (in DM/km2)
Y: Yield (in t / km2)
P: Market price of the crop (in DM / t)
C: Production cost of the crop (in DM / t)
D: Distance from the market (in km)
F: Transport cost (in DM / t / km)

• Based on this equation he theorized that “Producers

(farmers) aim to maximize location rent by minimizing the
transportation costs of getting goods to market”.
Johann Heinrich von Thunen
• Model of Agricultural Land
• von Thünen gave a predictive model of rural development around an
idealized isolated urban center, imposing several simplifications in
an attempt to focus on some of the fundamental processes at work
in settlement patterns and rural economic activity.

• Simplified assumptions:
• The city is located centrally within an "Isolated State."
• The Isolated State is surrounded by wilderness
• The land is completely flat and has no rivers or mountains
• Soil quality and climate are consistent
• Farmers in the Isolated State transport their own goods to market via
oxcart, across land, directly to the central city. There are no roads
• Farmers behave rationally to maximize profits.
Johann Heinrich von Thunen

Johann von Heinrich

Thünen concluded that the
cultivation of a crop is only
worthwhile within certain
distances from the city:
beyond that, either the cost of
the land becomes too high,
with increasing distances
transport costs also increase,
or, if there is another product
having greater yield or lower
transport costs
Alfred Weber
• Alfred Weber (30 July 1868 – 2 May 1958) was a German economist, sociologist
and theoretician of culture whose work was influential in the development of
modern economic geography. He is the author of Theory of the Location of
Industries, studied industrial location decisions, and built on von Thunen‟s theory
by considering not only the costs of getting goods to market, but also the costs of
transporting material inputs to the manufacturing plant.

• Considered Transportation cost as the direct function of the weight of the item
and distance shipped.

• He asserted that “all else being equal, manufacturers will locate their plants either
at the market or the source of the input depending on whether or not the final
product gains weight or loses weight in the manufacturing process”.

• Weber formulated a theory of industrial location in which an industry is located

where the transportation costs of raw materials and final product is at a minimum
(least-cost location). He gave two special cases of finding the least-cost
location as described below. His model allowed for three types of locations: (1)
raw materials locations, (2) a production site for final goods, and (3) a
consumption center.
Weber’s Weight-Losing Case
The weight of the final product is less than the weight of the raw
material going into making the product.

Fig. 1 Situation in which the processing plant is located somewhere between the source and
the market. The increase in transport cost to the left of the processing plant is the cost of
transporting the raw material from its source. The rise in the transportation cost to the right
of the processing plant is the cost of transporting the final product. Note the line on the left
of the processing plant has a steeper slope than the one on the right because the raw
material is heavier than the finished good. Fig. 2 Situation if the processing plant is moved
closer to the source of raw material. Note that the transport cost of the final product
delivered to the market is lower than in the previous location. The optimal location of the
processing plant is at source of the raw material, as shown in Fig. 3.
 Weber’s Weight-Losing case

Transportation
cost for the
product delivered
to the market will
be lowest of all if
the processing
plant is located at
the source of the
raw material.
Weber’s Weight-Gaining Case
The final product is heavier than the raw materials that requires
transport

The weight gaining case is illustrated in Figs. 4, 5 and 6. The optimal location
of the processing plant in this case is at the market.
 Weber’s Weight-Gaining case
Transportation cost
for the product
delivered to the
market will be lowest
of all if the
processing plant is
located at the
market.

Weber established that firms producing goods less bulky than the raw
materials used in their production would settle near the raw-material source.
Firms producing heavier goods would settle near their market. The firm
minimizes the weight it has to transport and, thus, its transport costs.
William Alonso
• 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.
• He postulated that there is an inverse
relationship between transportation
cost and rent such that if transportation
cost is high, then the rent is low.
• He developed the "Bid-Price Curve": A
set of combinations of land prices and
distances among which the individual is
indifferent (i.e. satisfied with the
combination of land price as well as the
distance at some point).
Walter Christaller
Central Place Theory
 Analyzes the size distribution
and firm composition of cities
 A geographical idea that
seeks to explain the number,
size and location of human
settlements in an urban
system
 Settlements simply function
as „central places‟ providing
services to surrounding
areas.
 CPT extends the idea to the case
where there is a hierarchy
(ranking order) of cities as well as
a distinction between urban and
rural areas.
 CPT is based on the idea that
different types of firms have
different market areas and that
cities are composed of these
firms.
– A market area is the area over
which a firm can under price its
competitors
– Size depends on the relative
production costs of firms, the
cost of transportation, and the
level of demand
Central Place Theory-W. Christaller
• A Central Place is a settlement which provides one or more services for the
population living around it (Ranking order of goods and services).

• Simple basic services, i.e. food, household items (things that replenish frequently)
are said to be low order
• Specialized services (e.g. computers, universities) are said to be of high order.

• Having a high order service implies there are low order services around it, but
not vice versa.

• Settlements which provide low order services are said to be low order settlements.
Settlements that provide high order services are said to be high order settlements.
• The minimum population size required to profitably maintain a service is the
threshold population.

• Factors affecting a fall in the threshold population are:

1. A decrease in population
2. Change in tastes
3. Introduction of substitutes
Central Place Theory-W. Christaller

The theory consists of two basic concepts:

1) threshold--the minimum market needed to
bring a firm or city selling goods and services
into existence and to keep it in business
2) range--the average maximum distance
people will travel to purchase goods and
services

Normally, the threshold is found within the

range, as the diagram shows.
Central Place Theory-W. Christaller
Central Place Theory-W. Christaller
Central Place Theory-W. Christaller
Central Place Theory-W. Christaller
According to the MARKETING PRINCIPLE
K = 3, the market area of a higher-order
place(node) occupies 1/3rd of the market area
of each of the consecutive lower size
place(node) which lies on its neighbor; the lower
size nodes(6 in numbers and 2nd larger circles)
are located at the corner of a largest hexagon
around the high-order settlement. Each high-
order settlement gets 1/3rd of each satellite
settlement (which are 6 in total), thus K = 1 +
6×1/3 = 3.

However, although in this K = 3 marketing

network the distance traveled is minimized, the
transport network is not the most efficient,
because there is no intermediate transport links
(network) between the larger places (nodes).
Central Place Theory-W. Christaller
 Central Place Theory-W. Christaller
According to K = 4 TRANSPORT PRINCIPLE, the
market area of a higher-order place includes a half of
the market area of each of the six neighboring lower-
order places, as they are located on the edges of
hexagons around the high-order settlements. This
generates a hierarchy of central places which results in
the most efficient transport network. There are
maximum central places possible located on the main
transport routes connecting the higher order center. The
transportation principle involves the minimization of the
length of roads connecting central places at all
hierarchy levels. In this system of nesting, the lower
order centers are all located along the roads linking the
higher order centers. This alignment of places along a
road leads to minimization of road length. However, for
each higher order center, there are now four centers of
immediate lower order, as opposed to three centers
under the marketing principle.
Central Place Theory-W. Christaller
Central Place Theory-W. Christaller
According to K = 7 ADMINISTRATIVE
PRINCIPLE (or political-social
principle), settlements are nested
according to sevens.

The market areas of the smaller

settlements are completely enclosed
within the market area of the larger
settlement. Since tributary areas
cannot be split administratively, they
must be allocated exclusively to a
single higher-order place.

Efficient administration is the control

principle in this hierarchy.
Central Place Hierarchy
Hamlets Villages Towns

Number of Places 20 9 4

Average Population 417 948 2433

Average No. of Establishments 6.9 54.4 149

Average No. of Functions 5.9 32.1 59.8

Average No. of Establishments per 1.2 1.7 2.5

Functions
Central Place Theory-W. Christaller
CONCLUSION
 The larger the settlements, the fewer their number
 The larger a settlement, the farther away a similar size
settlement is
 The Range increases as the population increases
 The larger the settlement, the higher the order of its services.
DEVIATIONS to this rule are:
o Tourist resorts that have a small population but large number
of functions.
o Dormitory towns that have a large population but a small
number of functions
 August Losch
 Improved Weber’s theory by
introducing the demand factor.
 He assumed that
manufacturers are driven to
maximize profit by locating at
the place that maximizes the
difference between revenues
and costs.
 He went on to assert,
however, that it is impossible
for a firm to evaluate all
possible points in order to
find “the place of greatest
money profit.”
Walter Isard
 Further developed the
isotropic sphere by introducing
the concept of substitution
into a general synthesis of the
works of Von Thunen, and
Weber.
 That is, “selection of a
manufacturing site from among
alternative locations can be
viewed as substituting
expenditures among the
various production factors
such that the best site is
chosen.”
Allen Pred
 Introduced a behavioral
matrix in which the quantity
and quality of information
available to a decision maker
is graphed on the y-axis and
their ability to use
information is graphed on
the x-axis.
 In this matrix the perfect
location decision would be
found at the intersection of
perfect knowledge and
ability to use that
knowledge.
Michael Weber
 The Impact of Uncertainty on
Location, 1972. Primarily
concerned with adding more
complexity into the isotropic
sphere by introducing the
uncertainty principle, which
effectively dismisses the
assumptions of perfect
knowledge of alternatives and
complete information.
 The greater the level of
uncertainty, the greater the risk.
 Michael Weber
 The Impact of Uncertainty on Location,
1972. Primarily concerned with adding more
complexity into the isotropic sphere by
introducing the uncertainty principle, which
effectively dismisses the assumptions of
perfect knowledge of alternatives and
complete information.
 The greater the level of uncertainty, the
greater the risk.
David Smith
 Brought into
question the role of
profit maximization
as the sole motivator
of location decisions.
 When choosing
location, firms
consider other
factors that are
either quantifiable or
unquantifiable.
Growth Pole and other Economic
Development Theories
Growth Pole Theory
 The growth pole concept originated
from British Economist, Sir
William Petty (1623-1687), who
was fascinated by the high growth
in London during the 17th century
and conjectured that strong urban
economies are the backbone and
motor of the wealth of nations.
 Growth Poles sometimes referred
to as “growth centers”.
 French Economist, Francois
Perroux, the Father of Growth Pole
Theory, who was credited with
formalizing and elaborating on the
concept in 1949.
From the Geography
Dictionary (2004) defines
growth poles as:
 “A point of economic growth.
 Growth poles are usually
urban locations, benefiting
from agglomeration
economies, and should
interact with surrounding
areas, spreading prosperity
from the core to the
periphery”.

Growth Pole Theory
 The core idea of GP is that
economic development, or
growth, is not uniform
across an entire region, but
instead takes place around
a specific pole. The pole is a
concentration of productive
activity and propagates
growth by the diffusion of
growth and spillover effects
into the surrounding
hinterland.
Growth poles were a

popular regional
development strategy in
the 1960s and early 1970s,
with governments
investing in centers that
were identified as growth
poles or growth centers, in
a belief that this would
ultimately reduce regional
disparities in employment
and incomes, facilitate
decentralization, or support
rapid industrialization.
Growth Pole Theory
 Attempts by governments to pick “winners
and losers” and to identify and invest in
growth poles have a very poor record of
success. Consequently, this approach to
regional development has been
discredited and generally abandoned
throughout the world. Parr (2001, p. 17)
referred to the “spectacular failure of
growth pole strategies.”
 Growth pole theory, as originally
formulated, assumes that growth does not
appear everywhere at the same time, but it
manifests itself in “points” or “poles” of
growth.
 In the Philippines, economic
developments similar to this idea are
the creation of free ports and
tourism enterprise zones
 RA 7916: Special Economic Zone
Act (1995)
 Export, IT, Tourism, Medical
Tourism, Agro-industrial Export,
& Agro-industrial bio-fuel
manufacturing
 RA 9593: Tourism Infrastructure and
Enterprise Zone Act (2009)
 TEZS: Cultural Heritage, Health
and wellness, Mixed-use, Edo-
tourism, General leisure, etc.
Growth Pole Theory  Polarization: rapid growth of
the leading industries which
 Darwent (1979) Perroux‟s work created deep and induces the polarization of other
serious confusion, partly because of the ambiguity economic activities into the pole
of Perroux‟s initial formulation, partly because of of growth. e.g. flow of
mistranslation from French to English and vice resources, capital, migration,
versa, and partly because of the semantic etc.
confusion of later authors. The original concept of
a growth pole was actually independent of a spatial
context or a geonomic (or geographic) space.
Rather, growth pole relates “only” and “specifically”
to abstract economic space. He, then, defines
growth poles as:
“….centers (poles or focii) from which centrifugal
forces emanate and to which centripetal forces are
attracted. Each center being a center of attraction
and repulsion has its proper field which is set in the
field of all other centers.” e.g. leading industries,
firms
Gunnar Myrdal: Cumulative Causation
 BACKWASH Effect: negative effects
caused by prosperous regions on
less prosperous regions, e.g.
concentration of resources in the
core at the cost of the periphery,
growing spatial inequality

 SPREAD Effects: beneficial impact

on the prosperous regions on less
prosperous regions. e.g. increased
demand, capital investment,
technology transfer
 Hirschman:
Polarization/Trickle Down
 Polarization – growth centers
attract or „drain” regional
resources
 Trickle Down – diffusion of growth
and innovation from the growth
center to the periphery
End of Presentation
Thank you.