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The Least Cost Theory was created to explain where an industry can locate to minimize costs, therefore maximizing profits. Weber states that there are three categories of cost:
1. Transportation: the site that is chosen for the industry must have the lowest possible cost of
A. moving inputs (raw materials) to the factory
B. moving the product to market
So, an Industry that is located close to the input source(s) and or the market is more likely to minimize its transportation costs. According to Weber this is the most important factor in the decision of the location of an industry.
2. Labour: Factories reduce the most cost when they are placed in the proximity of large supplies of cheap labour. A factory located near cheap labour may not need to be close to inputs or the market to reduce the overall cost and be profitable.(eg: Industries locating factories in China)
3. Agglomeration: An industry may also reduce costs by clustering in the same area as other industries. In this case the given industries may be able to provide assistance to each other through shared talents, resources, costs, services facilities etc. For example: Several industries cluster in a relatively undeveloped area with cheap labour. To make the area more profitable to all of them they together may pay to improve local infrastructure, such as roads.
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