|San José State University|
& Tornado Alley
The Economics of Location
Auguste Lösch (1906-1945) did original work on the economics of location. His analysis led him to formulate the concept of a hierarchy of market areas. Consider the following illustration of Lösch's concept.
Suppose in the wheat lands of Kansas the land is perfectly uniform. The wheat farmers need the storage service of a grain elevator. The area would then have grain elevators each serving a market area. The market areas would be hexagonal in shape. In the diagram below these market areas are outlined in blue. The size of the market area served by one grain elevator is dictated by the tradeoff between economies of scale in storage and the diseconomies in transportation costs. At the sites of the grain elevators there would be little towns, denoted in the diagram as blue circles.
In addition to storage the wheat farmers may need the services of farm equipment dealerships. Suppose that the optimal market area for an equipment dealership is much larger than that of a grain elevator. In the diagram the market area for one dealership is shown outlined in red. The equipment dealership will be located in one of the towns associated with a grain elevator. The presence of the dealership in that town will make it larger than the other town which have only a grain elevator. This larger town is shown as a red circle. The market areas for the other equipment dealerships are not shown in the diagram.
The optimal market area for an equipment dealership might not match up with the market areas of the grain elevator. In that case the market area for the dealership will not be the optimal one, but instead the one that matches up with the market areas of the grain elevators. The sites of the equipment dealerships have to be in the town associated with the grain elevators.
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