Transcript Chapter 5, continued

Chapter 5, continued
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Extensions of the Weber model
Economies of Scale
Vertical Integration & Vertical Disintegration
Localization and Urbanization Economies
Location theory: practice in reality
How and why firms grow
Geography of Large Corporate Organizations
Economic Geography and Social Relations
The Product Life Cycle Model
Business Cycles and Regional Landscapes
The State and Economic Geography
Extensions of the Weber Model
• Distortions of the Isotropic Plain
• Extension of the model from
manufacturing to other industries
– The long-run decrease in transport costs
– The substitution of brain-power for muscle
and machine power: really the changing
structure of production
– BUT Table 5.2 shows transport costs are
significant in many lines of manufacturing
Transport Costs as a % of Product Price
Simplifying Assumptions:
The Isotropic Plain
The concept: equal properties in all directions:
Flat, no movement barriers
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Transport costs proportional to distance
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Equal Quality Environment
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Population evenly spaced
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Identical Income Levels, Tastes, Demands
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Perfect Knowledge: consumers & producers
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Producers seek to maximize profit
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Scale economies exist in production
Economies of Scale
Generic problem in mfg: How large of a market
to serve? It depends in part on the existence
of opportunities to exploit economies of
scale.
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No scale economies
AC
Scale Diseconomies
Scale economies
Quantity
Returns to scale: Labor
Labor Units Total Output
1
2
3
4
5
6
7
8
500
1500
2750
3850
4750
5500
6100
6600
Marginal
Output
500
1000
1250
1100
900
750
600
500
Average
Productivity
500
750
917
963
950
917
871
825
Returns to Scale, 1 Factor
Input
Increasing
7000
Returns
6000
5000
4000
3000
2000
1000
0
0
Negative
Returns
Diminishing
Returns
Total Output
Marginal
Output
Average
Productivity
5
10
Labor
Units
1
2
3
4
5
6
7
8
Total Total Labor
Average
Output
Cost Labor Cost
500
$20,000
$40.00
1500
40,000
26.67
2750
60,000
21.82
3850
80,000
20.78
4750
100,000
21.05
5500
120,000
21.82
6100
140,000
22.95
6600
160,000
24.24
Average Labor Cost
Assume Labor cost
is $20,000 per year
per worker
50
40
30
20
10
0
0
2
4
6
8
10
Fixed Costs: Assume $100,000
Average Cost of Capital
$100K
Quantity of Output
Average Total Costs
Labor
Units
1
2
3
4
5
6
7
8
9
Total Total Labor
Average
Total
Output
Cost Total Cost
500 $120,000
240.00
1500
140,000
93.33
2750
160,000
58.18
3850
180,000
46.75
4750
200,000
42.11
5500
220,000
40.00
6100
240,000
39.34
6600
260,000
39.39
7000
280,000
40.00
Forces Underpinning Scale
Economies
• Four Broad Forces:
1. Specialization of manpower & equipment:
The division of labor - internal to a firm (detail)
- among firms (social)
(a) increased dexterity of workers in a given task
(b) savings of time as workers move from one task
to another
(c) scaling capital equipment to individual tasks with
the proper capacity. “Lumpiness” of capital
From Adam Smith, The Wealth of
Nations, written in 1776
Forces underpinning scale economies
2. Economies of the large machine
1’ x 1’ x 1’ = 1 cubic foot volume
6 square feet surface
2’ x 2’ x 2’ = 8 cubic feet volume
24 cubic feet surface
Change in volume - 8x, change in surface 4x
A tube: if r = 1, Volume = r2, Surface = d
or volume = 3.14, surface 6.28
if r = 2, Volume = 12.56, surface = 12.56
Change in volume: 4x, change in surface 2x
The “2/3 rule”
Forces underpinning scale economies
3. Economies of massed reserves
In large scale facilities, multiples of given types of
equipment lessen the chance of an entire
production system being down due to equipment
failure.
4. Economies of large scale purchasing
•forward & backward ripple effects from volume
•lowered shipping costs
LRAC
Alternatives
(Need to look
at revenue as
well)
Vertical Integration & Vertical
Disintegration; Diversification
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The make or buy decision
Consideration of transactions costs
Changes in products & processes
Horizontal integration – increasing
ownership concentration in an industry
• Diversification – spreading risks
• Movie industry as a classic case of vertical
disintegration
Agglomeration
Advertising Agencies in Manhattan, 1976 and 1996, see Fig. 5.11 in text
1860
1901
1951
Asthabula Ohio Industrial Complex
Ores & Lime
Ferro alloys
Electro Met Co
Div. Of U.C.C.
Oxygen
Linde Air Prod.
Div. Of U.C.C.
Fatty Alcohols
Archer-Daniels
Midland
Fats
Oils
Salt
Detrex Chemical
Industries
U.S. Indust. Chem
Div. Nat.Distillers
Titanium
Metal
Chlorinated
Solvents
General Time
& Rubber
Polyvinyl
Resins
Electro Met. Co. TiCl4
Titanium Plant
Stauffer
Chem. Co.
Titanium &
Zirconium Ores
U.S. Industrial Chem.
Titanium-Zirconium
Titanium
& Zirconium
Metals
Localization
Versus
Urbanization
Economies
? Optimal Size for
Agglomerations (Cities)?
Annual Net Economies
Total Economies
Transportation economies
Power Economies
Labor economies
Education economies
1K
10K
100K
Population
1,000K