Geography Reference
In-Depth Information
Wage
w*
-$20
-$50
-$80
-$100
K*
G
H
I
J
distance
Figure 3.7
Equilibrium labour prices
of these superior alternatives, J is the best location because profits here are
$6 per unit of output greater than at K *, whereas at G they are only $2,
at H only $5, and at I only $4 greater than at K *. In preference ordering
we can say that J . H . I . G . K *, and that the firm will prefer to move to
location J so as to maximize its profits. What this stylized example demon-
strates is that as long as the variation in local land and labour factor prices
is greater than the transport costs defined by the isodapanes, then the firm
will be willing to move to alternative locations.
This type of approach now directly allows us to ask: by how much will
local wages and land prices have to vary over space in order for the firm's
profits to be the same for all locations? The answer implies to identify the
critical change in local wage and land prices with respect to K * just beyond
which it will allow a firm to move away from K *. This critical change in
local factor prices can be understood with the help of Figure 3.7, in which
the vertical axis represents the costs, and the horizontal axis is constructed
by drawing a line from K * eastwards passing through G , H , I , J , according
to the geographical distance of each of these locations.
From the above example, we know that location G is on the $20
isodapane, H on the $50, I on the $80 and J on the $100 isodapane. We
can therefore plot the positions where each of the $20, $50, $80, and
$100 isodapanes intercepts with both the vertical axis and the horizontal
axis.
The critical change in factor prices just beyond which a firm will be
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