Download Theories of Distribution

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 Competition
2. Questionable assumptions (a)homogeneous units (b)full
employment (c) perfect mobility (d) divisible factors (e)
profit maximization objective
3. Short period ignored
4. It’s a static theory
5. Theory of exploitation
6. One-sided
7. Immeasurability
8. Normative aspect ignored
9. Ignore personal distribution
10. 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.
Assumptions
1. No alternative use of land
2. Rent depend on the main qualities of land i.e.
fertility and location
3. All cultivable lands are owned by landlords
4. Different in fertility
5. Diminishing returns
6. Original and indestructible powers
7. Perfect competition
8. Order of cultivation
9. Marginal land
10.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 wages
2. Purchasing power of money
3. Opportunity of supplementary earnings
4. Additional facilities
5. Extra work without extra payment
6. Nature of employment
7. Strain of work
8. Professional expenses
9. Cost of professional training
10. Future prospects
11. 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
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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