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Theory of Distribution

01-DEC-2014 09:40

    The theory of distribution is that incomes are earned in the production of goods and services and that the value of the productive factor reflects its contribution to the total product. Distribution refers to the way total output, income, or wealth is distributed among individuals or among the factors of production such as labour, land, and capital. In general theory and the national income and product accounts, each unit of output corresponds to a unit of income.It is the systematic attempt to account for the sharing of the national income among the owners of the factors of production i.e., land, labour, and capital. Economists have studied how the costs of these factors i.e., rent, wages, and profits and the size of their return are fixed.

    Advantages of Distribution theory

    The great advantages of the theory of distribution is that

    • It treats wages, interest, and land rents in the same way.

    • Is its integration with the theory of production.

    • Itlends itself to a relatively simple mathematical statement.

    Aspects of distribution

    The aspects of distribution can be as follows:

    a. Personal distribution

    Personal distribution is primarily a matter of statistics and the conclusions that can be drawn from them. The inequality seems to be greatest in poor countries and diminishes somewhat in the course of economic development. Some authorities point to the natural inequality of human beings (differences in intelligence and ability), others to the effects of social institutions (including education); some emphasize economic factors such as scarcity; others invoke political concepts such as power, exploitation, or the structure of society.

    b. Functional distribution

    The theory of functional distribution, which attempts to explain the prices of land, labour, and capital, is a standard subject in economics. It sees the demand for land, labour, and capital as derived demand, stemming from the demand for final goods. Behind this lies the idea that a businessman demands inputs of land, labour, and capital because he needs them in the production of goods that he sells. The theory of distribution is thus related to the theory of production, one of the well-developed subjects of economics.

    Influences on distribution

    • Price

    The traditional inflationary sequence was that as prices rose, profits would increase, with wages lagging behind; this would tend to diminish the share of labour in the national income.

    • Technology

    Another dynamic influence is technological progress. The concept of the production function assumes a constant technology.

    Marginal Productivity alias Theory of Distribution

    The theory explains how the prices of the various factors of production would be determined under conditions of perfect competition and full employment.

    According to the Marginal Productivity Theory, the price of any factor will be equal to the value of its marginal product. For example, we know that a consumer will demand a commodity up to the point at which its marginal utility is proportional to the price he pays for it. Similarly, a firm will go on employing more and more units of a factor until the price of the factor is equal to the value of the marginal product. This is equal to the value of the additional product, which an employer gets when he employs an additional unit of that factor, the supply of all other factors remaining constant.


    In many traditional economies, community interests take precedence over the individual. Individuals may be expected to combine their efforts and share equally in the proceeds of  labor. In other traditional economies, some sort of private property is respected, but it is restrained by a strong set of obligations that individuals owe to their community.

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