METARIAL NO… 37

FOR T.D.C PART- II (GEOGRAPHY HON’S)

Paper – 4th ( Economic Geography )

BY
Dr. ALPNA JYOTI
Deptt. of Geography, Marwari College,Darbhanga
LNM University, Darbhanga

Q. - LOSCHA’S MARKET AREA OR PROFIT MAXIMISATION APPROACH

Introduction to the Profit Maximisation Theory:

August Losch, a German economist, published his theory of ‘Profit Maximisation’ in the year 1954. The
least cost location theory of Weber was wholly discarded by Losch. In fact, he suggested that, ‘profit
maximization’ is the only objective of the entrepreneur, whether it is state or an individual. The major
objective of the industry is, therefore, to find out the place where maximum profits occur.

Unlike Weber, who postulated his entire theory in an economic state of perfect competition, Losch, on
the other hand, explained his theory within the environment of monopolistic competition. According to
Losch, industry will not necessarily be located within the least cost (transport cost and labour cost)
location; rather it would locate in areas where maximum profit will occur. So, ignoring transport cost,
labour cost and agglomeration cost, he emphasized more on the total production cost.

To get the maximum profit, as stated by Losch, total consumption is important. Higher the consumption
rate, greater will be the profit. In this case, he emphasized most on the price reduction of the
commodity. Any decrease of price would automatically stimulate the volume of consumption.

This can be illustrated by the following diagram. In this simple model, it is evident that when price of the
commodity drops from R to P, the consumption increases from M to N. The theory of August Losch
considered demand as a most important variable. The fundamental objective behind the theory was to
find out the most profitable location for industrial establishment.
Assumptions of the Profit Maximization Theory:

Like Weber, he also considered certain assumptions for the success of his theory.

In the presence of certain optimum conditions, the maximum profit location may occur:
1. The area under consideration should be an extensive homogenous plane where raw materials
are distributed evenly.

2. The ‘transport cost’ is uniform and directly proportional in all the directions.

3. The people inhabiting the region have a general homogeneity either in taste, knowledge and
technical skill.

4. There is no economic discriminations among the people. The economic and career building
opportunities are open and uniform to all individuals.

5. The population distribution is very even and the area is self-sufficient in agricultural production.

To establish his theoretical model of the theory, August Losch proposed three distinct phase of
development.

The phases are as

follows:
I. In this first phase Losch observed that if sufficient and symmetrical demand of a product prevails in the
market, the market conditions may be explained by a demand cone. The following diagram illustrates
that the effective demand of the particular product will be exactly same to the volume of the cone.

In Fig. 5, P is a producer, and demand curve is lying on QF. P or price line, controlled jointly by transport
cost and distance. The price increased from P to F. Along the Y axis or PQ, demand of quantity is
measured between PF and QF.

When PF is taken as a measure of distance and is rotated about P, the circular market area is formed,
bounded by the locus of points F, where the price becomes too high. Total sales are given by the volume
of the cone produced by the rotation of PQF.

In Fig. 5, it is clear that, away from center, with increasing distance, demand of the quantity drops
drastically.

II.In the second phase, within the vast rounded area, several factories will concentrate. The virgin,
extensive market area will automatically give a lucrative operational area.. But despite the growing
competition among the firms to capture larger share of consumer and larger market areas, there should
be some void in the boundary zones.

Like intra-molecular space, a certain amount of region will remain un-served or poorly served. Though
the mal-distribution of firms may result in shrinkage of areas in some instances, some other regions will
be devoid of any industry. The circular pattern of industrial hinterland in phase two will ultimately
decide the future of the industry in that region.

In Fig. 6, the space situated outside the circular areas are still lying vacant. It is quite natural for the
other industries to capture this potential market areas, hitherto unexploited. The influx of new
industries in the region will result in shrinkage of the market areas (denoted in Fig. 6 by circle) of
different production centres.

The intrusion of one market area to other will distort the circular market areas and the market areas of
different production units will further reduce. This situation will lead to the initiation of the third phase.

III.In the third phase of industrial location witness the narrowing of the intermediate space between two
market areas. The areas fall vacant between the different market areas become the target of new
enterprises.

As new firms set up within the vacuum, the hinterlands of earlier industries become reduced.
The reduction of the market area results in rapid disruption of the early circular pattern. Gradually the
market area of the industries attain a hexagonal shape.

According to Losch, when any area possesses several hexagons, lying upon each other and surrounding
a particular centre, a metropolitan city will grow. In other words, it may be said that around the nucleus
of a city, numerous hexagons or market areas of different commodity will grow.

So, in this fashion, industries would concentrate within a region, each having different products. So,
almost all types of materials including raw materials should be available on that point. Hence, any new
industry would get its required raw material within near distance. Obviously, the total transport cost in
that place will be minimum. In this way, ‘equilibrium conditions’ as stated by Losch may be attained (Fig.
6).

Losch, however, himself hinted about the deviation of his theory in some special conditions. According
to his conception, when price of the commodity of a particular firm increases,demand of the product
decreases considerably.
 Naturally, due to higher price, the company loses some of its market area. Automatically, that area is
encroached by the adjacent firm. In this fashion, market area of a unit changes continuously. This
incident was explained by the figure given by Losch in Fig. 7.

Fig. 6 shows the development of hexagonal market area in the third stage. The dotted lines represent
market boundaries of respective production centres. The crossed area is the production centre.

In Fig. 7, as stated by Losch, A and B are two producing centres, with total production cost of P and Q.
Their respective market boundaries are CPD1 and EQD1. At the product cost of M, their production
touches the optimum level and equilibrium is attained. But when production cost at A increase from P1
to P2, the equilibrium condition is disrupted. The product of A becomes less attractive than before, so
market boundaries also reduces from CP1D to C1P2D2.
Following the reduction of market of A, automatically market area of B advances in that void region.
The previous area of EQD1 increases to EQD2. This D1D2 areal increase is well reflected in the circular
diagram of Losch. The BD1 radius increases to BD2 and former AC radius reduces to AC1.

Merits of the Profit Maximisation Theory:

1. August Losch tried to restore a order in the former chaotic classifications of industrial location.

2. He was the first person to consider the influence of the magnitude of demand on industrial
location.

3. August Losch rightly emphasizes upon the role of competition as an important determinant of
location analysis.

4. The calculations adopted by Losch were simple and easily applicable to any place.
5. The theory has also a philosophical contribution on the motive of entrepreneurs’ role.

6. His equilibrium concept is perhaps the greatest contribution among the location theories
developed later on.

7. The least cost concept of Weber was nullified by Losch and instead more precise ‘profit
maximization’ concept was adopted.

The major points against the theory are as follows:

1. This theory is essentially a simplified model or theorizing of an ideal condition. In reality, only in
a rare occasion, these events may occur.

2. The assumed conditions of homogeneous plain region, equal distribution of raw materials and
uniform transport rates never occur in the real world. Therefore, Losch’s theory, as said by some critics,
is nothing but only intellectual exercise.

3. Losch even assumed the cultural homogeneity and uniform taste of the people within the
region. This is nothing but absurdity.

4. He ignored the variation of technological development of different regions. The difference of

technical know-how may offset the theoretical model.

5. Political decisions play an important role in the industrial location. Losch ignored it.

6. The variation of the cost of raw materials and labour wage rates were not given proper
weightage in the theory.

7. Losch categorically separated the role and effect of agriculture and industry. But this difference
is somehow arbitrary in nature.

8. The abstract and optimum situation demanded by the theory may be available in agriculture but
not in the complex production process of modern manufacturing industries. Thus, Losch theory is more
practical in agriculture, rather than in industry.
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