A model of industrial location proposed by A. Weber (1909, trans. 1929), which assumes that industrialists choose a least-cost location for the development of new industry. The theory is based on a number of assumptions, among them that markets are fixed at certain specific points, that transport costs are proportional to the weight of the goods and the distance covered by a raw material or a finished product, that perfect competition exists, and that decisions are made by economic man.
Weber postulated that raw materials and markets would exert a ‘pull’ on the location of an industry through transport costs. Industries with a high material index would be pulled towards the raw material. Industries with a low material index would be pulled towards the market.
Once a least-cost location has been established, Weber goes on to consider the deflecting effect of labour costs. To determine whether the savings provided by moving to a location of cheaper or more efficient labour would more than offset the increase in transport costs, isodapanes are constructed around the point of production at the point of minimum transport costs. The extra price of the wage bill is calculated for the point of production. If the source of cheap labour lies within the isodapane which has the value of the higher wages differential (the critical isodapane), it would be more profitable to choose the site with low labour costs rather than the least transport costs location.
Industrial location may be swayed by agglomeration economies. The savings which would be made if, say, three firms were to locate together, are calculated for each plant. The isodapane with that value is drawn around the three least-cost locations. If these isodapanes overlap, it would be profitable for all three to locate together in the area of overlap.
Source: http://www.answers.com/topic/weber-s-theory-of-industrial-location#ixzz1FDsbblRQ
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