Why location matters
Location is the place where a business works: a shop, office, factory or warehouse. A good location brings in customers and keeps costs low. A poor one is hard to fix, because moving costs a lot.
A firm weighs several location factors and picks the place with the best balance for its type of business.
Near the market, labour and raw materials
- Market (customers): shops, cafés, salons, banks and other services need passing trade. Firms making fresh, fragile or bulky finished goods (bread, ice, furniture) also locate near buyers to cut delivery cost.
- Labour (workers): a firm needs enough workers with the right skills. Tech firms go where engineers live; factories needing many workers may move where wages are lower.
- Raw materials: if inputs are heavy and lose weight during making (ore to steel, sugarcane to sugar), it is cheaper to build near the source. Perishable inputs (fresh milk, fruit) also need to be close.
- Transport: good roads, rail, ports and airports make it cheaper to bring in materials and send out goods.
Costs and competition
- Cost of land, rent and rates: city centres are expensive; edges of towns are cheaper. A big warehouse needs cheap land.
- Wages: vary from place to place.
- Competition: many rivals nearby can take customers away. But some firms cluster on purpose: car showrooms or jewellery shops on one street attract more shoppers to all of them.
- Other factors: government grants or tax breaks for poor areas, laws and planning rules, power and water supply, and the owner's own choice (living nearby).
Technology and location
The internet makes location less important for some firms. An online shop or a firm whose staff work from home can choose cheap space far from customers. But it still needs fast internet, a good delivery network and space for stock. Physical shops still matter for things people want to see or try first.
Try it
Walk down a street near you. For three businesses, write which factor most likely decided their location (market, labour, materials, transport, cost, competition). In the 3D free play, pick each business and check your guess.
Key formulas and definitions
- Location factors: Market, Labour, Raw materials, Transport, Cost, Competition
- Bulk-reducing (weight lost in making) → locate near raw materials
- Bulk-increasing, fragile or fresh product → locate near market
- Transport cost = weight × distance × rate per tonne-km
- Online firms: location freer, but need internet and delivery links
Worked examples
1. Why do most mobile phone repair shops sit on busy streets?
They are a service; customers come in person. Busy streets bring many passing customers, so being near the market matters most.
2. A sugar mill uses 10 tonnes of sugarcane to make 1 tonne of sugar. Where should it be built? Why?
Near the sugarcane fields. Cane is heavy and spoils fast, and 90% of the weight is lost, so carrying sugar is far cheaper than carrying cane.
3. Transport costs ₹5 per tonne per km. A factory needs 100 tonnes of ore from a mine 200 km away. Find the cost. How much would it save at 20 km?
100 × 200 × 5 = ₹1,00,000. At 20 km: 100 × 20 × 5 = ₹10,000. Saving = ₹90,000.
4. Give one reason a jewellery shop may choose a street full of other jewellery shops.
Shoppers come to that street to compare, so all shops get more visitors (clustering), even though competition is high.
Common mistakes
- Thinking cheapest land is always best. A shop on cheap land with no customers will fail.
- Saying all factories must be near raw materials. Only when inputs are heavy, bulky or perishable.
- Ignoring competition: a café next to three cafés needs a clear difference.
- Thinking online firms need no location at all. They still need storage, internet and delivery links.