Theories of Distribution

Distribution

• Distribution refer to that branch of economics which analyses how the national income of a country is divided among the various factors of production

• Functional Distribution• Personal Distribution

Marginal Productivity Theory of Distribution

• Theory of factor pricing• “Under static conditions, every factor including the

entrepreneur, would get remuneration equal to its marginal product” – Prof J B Clark

• Derived demand• Entrepreneur will employ a factor till its marginal

productivity is equal to its price• Marginal Physical Product (MPP)• Marginal Value Product (MVP)• Marginal Revenue Product (MRP)• Average Revenue Product

Relationship between ARP and MRP

Critical Evaluation of Marginal Productivity Theory

1. Perfect Competition2. Questionable assumptions (a)homogeneous units (b)full

employment (c) perfect mobility (d) divisible factors (e) profit maximization objective

3. Short period ignored4. It’s a static theory5. Theory of exploitation6. One-sided7. Immeasurability8. Normative aspect ignored9. Ignore personal distribution10. Reward determines productivity

Rent

Different Concepts of Rent

• Contractual Rent• Differential Rent• Pure Rent

Ricardian Theory of Rent

• That portion of the produce of the earth which is paid to landlord for the use of original and indestructible power of the soil.

Assumptions1. No alternative use of land2. Rent depend on the main qualities of land i.e.

fertility and location3. All cultivable lands are owned by landlords4. Different in fertility5. Diminishing returns6. Original and indestructible powers7. Perfect competition8. Order of cultivation9. Marginal land10.Tendencies

Wages

Wages

• Payment made for the service of labour• Mental labour and physical labour• A wage is a price, it is a price paid by the

employer to the workers on account of labour performed

• Nominal Wage and Real Wage• Time Wage and Piece Wage

Factors Determining Real Wages

1. Level of money wages2. Purchasing power of money3. Opportunity of supplementary earnings4. Additional facilities5. Extra work without extra payment6. Nature of employment7. Strain of work8. Professional expenses9. Cost of professional training10. Future prospects11. Social status

Interest

Interest

• Interest is a premium paid on capital that is borrowed

• Interest is price paid for a loan – Prof Benham• In economic interest does not refer to the

total amount paid by a borrower, but to that part of his payment which can be attributed to the use of capital only, ad for nothing else.

Gross Interest and Net Interest

• Pure or net interest• Assurance against risk• Wages for management• Reward for inconvenience

Profit

Profit

• The share of income that the entrepreneurs receive in the process of distribution is known as profit

• Profit differ from other factor returns• Profit may be negative• Profit fluctuates more than other factors• Profit is a residual income

Gross Profit and Net Profit• Reward for the factors of production supplied

by the entrepreneurs• Charges of maintenance (a) depreciation (b)

Insurance charges• Extra personal gains (a) monopoly gains (b)

windfall gains• Reward for (a) risk taking (b) bargaining skill

Theories of Profit

• Risk Theory of Profit• Uncertainty theory of profit (a) Insurable risk

(b) non-insurable risks – competition risk, technical risk, risk of government policy, business cycle risk

• Innovative Theory of Profit (a) those innovation which reduce the cost of production (b) those innovation which change the demand of utility function

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