The factors of production – Land, Labour, Capital and Organisation (Entrepreneur) – are all involved in production. The theory of factor prices is popularly known as the theory of distribution; it explains how rent, wages, interest and profit are determined. "Distribution accounts for the sharing of wealth produced by a community among the agents or owners of the factors which have been active in its production" – Chapman.
1. Meaning and Kinds of Distribution
Distribution means division of income among the four factors of production: rent to landlords, wage to labourer, interest to capital and profit to entrepreneurs.
- Personal Distribution – distribution of national income among the individuals.
- Functional Distribution – distribution of income among the four factors of production for their services in production.
2. Marginal Productivity Theory of Distribution
Developed by Clark, Walras and others; also called the General Theory of Distribution or National Dividend Theory of Distribution. The price or reward for any factor equals the marginal productivity of that factor.