Traditionally economics has been divided into four compartments namely, consumption, production, exchange and distribution.
Distribution is that branch of Economics, which analyses how the national income of a commodity is divided among the various factors of production.
“The economics of distribution” says Chapman “accounts for the sharing of the wealth produced by a community among the agents or the owners of the agents which have been active in its production.” the theory of distribution is concerned with the evaluation of the services of the factors of production.
According to Prof. Samuelson, “Distribution is concerned with the problem of how the different factors of production land, labor capital and entrepreneurship are priced in the market.” The theory of distribution is mostly an extension of the theory of value.
In the theory of distribution, the prices not of the factors of production but of their services are determined. The theory of factor pricing is popularly known as the theory of distribution. The production of national wealth is compared to the pouring of water in a reservoir by four big pipes representing the four agents of production. Out of this reservoir, four small channels flow out in the form of rent, wages, and interest and profit the total of which constitutes the national dividend.
Thus, the national dividend is at once the aggregate net product of, and the sole source of payment for all the agents of production.
The problem of distribution may be studied with reference to the individuals or with reference to the factors of production. The former is known as personal distribution and the latter is known as functional or factorial distribution. Personal distribution refers to the division of income among individuals. It relates to the size and not to type of the person’s income.
Under personal distribution, we study the extent and causes of inequality etc. Under functional distribution, we study how income of the factors of production is determined for their contribution to the productive process. It relates to the problem of pricing of factor services used in production. Here we want to know how the prices of factors of production like rent, wages, interest and profit are determined. The problem of factor income is dealt with by the theory of functional distribution.
The micro theory of distribution dealing with the determination of price per unit of a factor is similar to the theory of value. In fact, most American writers characterize micro theory of distribution as pricing of a factor services. Just as the price of commodity depends on the demand for the supply of that commodity, similarly, the price of a factor will depend upon the demand for the supply of that factor.
But there are two essential differences between commodity pricing and factor pricing. Firstly, the demand for a commodity is a direct demand, which comes from the consumers of that commodity and is governed by the marginal utility of that commodity. But the demand for a factor is a derived demand, i.e. it is derived from the demand for the commodity it helps to produce and is governed by the marginal productivity of that factor. Secondly, the demand for factors of production is necessarily joint demand since in every line of production, different factors of production have to be combined to produce anything.