Theory Of Distribution In Economics Pdf

Is it possible to generalize about them? Initially, the theory was propounded as an explanation for the determination of wages i.

In reality, however, all factor units can never be alike. This is the marginal physical product. It has been severely criticised by modern economists, who have put forward the demand and supply theory which is now widely accepted. Because it considers only demand for factors in terms of its Marginal Revenue Product but it fails to analyse the conditions of supply in the factor market.

But how do we measure the product? But, as Keynes pointed out, in reality there is a likelihood of under-employment rather than full employment. We can get value product by multiplying the physical product i.

The theory of distribution involves three distinguishable sets of questions. It is distribution not among individuals but among agents of production. First, how is the national income distributed among persons? Here, we should remember that the demand for a factor of production is not a direct demand. These shares are commonly described as wages, rent, interest and profits in the aggregate production.

It may also be understood that the prices of the factors of production are really the prices paid for them by the firms producing that commodity. There is no automatic movement of factors units from one place to another. But it should be remembered that Gross National Income is never distributed.

But the general theory of value is not applicable to distribution in its entirety. Production and distribution go on side by side.

In this theory it has been assumed that the marginal physical product of an individual factor can be measured by keeping other factors unchanged. This is so because of some fundamental differences between a commodity and a factor of production.

Chapter Theories of Distribution - Managerial Economics Book

Chapter Theories of Distribution - Managerial Economics Book

Distribution is always done of Net National Income. To earn total income one has to incur certain expenses. Further, the supply of labour does not depend only on economic factors but many non-economic considerations also.

Distribution and Theories of Distribution (With Diagram)

Lecturer Notes on the Theory of Distribution

Marginal product, also known as marginal physical product, is the increment made to the total output by employing an additional unit of a factor, keeping all other factors constant. We are concerned here with the marginal product which means an addition made to the total output of the commodity by the addition of one unit of a factor of production.

It thus follows that the reward price of a factor tends to be equal to its marginal productivity. It does not consider anything or it does not have any ethical justification or social norm in determining the reward factor. It is governed by a definite economic principle viz. The marginal productivity theory is applicable only to a static economy as it regards no change in technology.

Further, when all factors receive their shares according to their respective marginal products, the total product will be exhausted. This applies also to the other factors of production and their rewards. The marginal value product means the value of additional product obtained by the employment of another unit of a factor of production. Similarly, plots of land differ in fertility and so on.

To conclude, this is how that the price of a factor of production in the factor market is determined by the interaction of the forces of demand and supply in connection with the factor of production. Therefore, where the work of distribution is done with equity and justice the various channels of distribution are satisfied with its workings. When we say that it is an addition to the total product by the addition of one more unit of a factor of production, say one hectare or one worker, or a unit of Rs.

Lecturer Notes on the Theory of Distribution

We have seen earlier that the marginal productivity theory only tells us that how many workers will an employer engage at a given level in order to earn maximum of profit. That is why it is said that the general theory of demand and supply which determines the price of a commodity can also be applied to the determination of factor pricing.

The demand for labour entirely depends upon the demand for goods. Therefore, we can say that if the price of a factor increases, it supply will also increase and vice-versa.

Competition among employers will raise the wage to the level of marginal productivity. The theory assumes that all factors are fully employed. Differences and Similarities Rent. Further, the demand price of a factor of production also depends upon the value of the finished product in the production of which the factor is used.

Distribution theory

Distribution theory

First we are going to consider the demand side of the factor. Thus, from this figure it can be ascertained that-according to the law of diminishing marginal productivity, the more a factor is employed, the lower is the marginal productivity. Thus eminent economists are of this opinion that this is the proper, correct and satisfactory theory of distribution. What remains is the national dividend. It does not tells us how that wage-level is determined.

Contrary to this if the methods of distribution are improper and a particular class is being exploited then there will be dis-satisfaction feeling will crop up among people. Distribution theory economics. Robinson and Chamberlin have rightly pointed out that perfect competition is not a very large relative phenomenon. Again, the entrepreneur earns profit which is a residual income, 100 plantas medicinales escogidas pdf which can be negative as well. What can you say about the cost of production of a worker or of a hectare of land?

But it is the physical product and not product in terms of value. In spite of these qualifications, the general theory of demand and supplies, does apply to the pricing of agents of production also. But in reality, factors are imperfectly mobile between regions and occupations. We may express in terms of quintals of wheat or the number of chairs produced. If the demand for goods increases, the demand for the factors which help to produce those goods will also increase.

Managerial Economics by Vanita Agarwal

The word net in the definition given above is important. For instance, we may express it in terms of quintals of wheat or the number of chairs produced. Further, the marginal productivity theory describes the problem of the determination of the reward of a factor of production from the side of demand only. These questions have to do with functional distribution.