Geography Reference
In-Depth Information
true in terms of holding input goods which have to be paid for on delivery,
and whose delivered c.i.f. (cost, insurance, freight) inventory holding cost
can be written in f.o.b. (free on board) terms as (
p
1
1
t
1
d
1
) or (
p
1
1
t
1
d
1
). As
such, the cost of a unit of inventory is clearly a function of distance. The
further an input has to travel to the plant, the higher is the cost of a unit
of input inventory being held by the firm at
K
. The time costs of holding
these input inventories depend on the average value of inventory held
at any time, and assuming a stable flows of inputs into the factory, the
average value of input inventory held by the plant can be written as
Q
1
(
p
1
1
t
1
d
1
) or
Q
2
(
p
1
1
t
1
d
1
), where
Q
1
and
Q
2
refer to the size of each individual
input shipment. If the input quantities per time period being demanded
by the firm are
m
1
and
m
2
respectively, then the number of shipments per
time period, or in other words the shipment frequencies, can be written
as
f
1
5
m
1
/
Q
1
and
f
2
5
m
2
/
Q
2
, respectively. The logistics-costs framework
demonstrates that the inventory holding costs for each of these inputs can
therefore be written as
IQ
1
(
p
1
1
t
1
d
1
)/2 and
IQ
2
(
p
1
1
t
1
d
1
)/2, respectively.
The inventory holding costs parameter
I
is comprised of the inventory
capital financing interest rate
i
, the insurance rate
r
, and the land space-
holding costs which are a combination of the rents
R
per square metre of
inventory storage space and the labour prices
w
associated with managing
inventories.
The same argument also holds for output inventories of finished goods
which are waiting to be shipped to the market. In this case the output
holding costs are the opportunity costs of time associated with a less-than-
infinite shipment frequencies, whereby firms forego immediate inflows
of funds which can reduce ongoing debt levels, in order to economize on
shipment frequencies which increase the transport costs on outputs. In this
case, using the same terminology as before, the inventory holding costs
for finished goods can be written as
IQ
3
(
p
3
- t
3
d
3
)/2. The total inventory
holding costs faced by the firm are the sum of the input plus output inven-
tory holding costs.
The point here is that the costs of economic geography are not just
transportation costs as assumed in the simple Weber model and all of its
subsequent variants, but also all of the distance-related costs tied up in
inventory holding along with the location-specific land costs tied up in
holding inventories. The total costs of time are embodied in the firm's total
capital costs associated both with the capital tied up with transactions fre-
quencies, and also with the stock of capital held in the form of inventory.
This argument follows the Austrian school circulating capital concept
of Böhm-Bawerk and closely mirrors the bathtub model of Dorfman
(McCann 1995).
Finally, as well as these various capital costs, each time an input or
