Distribution refers to that branch of Economics, which analyses how the national income of community is divided among the various factors of production. This is known as functional or factor distribution. On the other hand, division of national income among individuals of a country is called personal distribution.
Mircro theory of distribution refers to pricing of factor services or functional or factorial distribution. The price of a commodity and a factor of production depend on the demand for and supply of a commodity and a factor. But there are two differences between commodity pricing and factor pricing.
Demand for a commodity is a direct demand, which is governed by marginal utility of that commodity. But demand for a factor of production is a derived demand and is governed by marginal productivity of that factor. Moreover, demand for a factor of production is a joint demand, which is not true in the case of a commodity. Firms demand for factors as they use them in the process of production. The demand for factors is influenced by the demand for the final product, quantity of other factors price of other factors and value of the finished product etc.
Marginal productivity theory states that the income of a factor depends on its marginal productivity. Productivity of factor may be expressed in terms of physical productivity and revenue productivity.
Marginal product (MP) of a factor is the addition made to the total product (TP) due to the employment of an additional unit of that factor. Marginal physical product (MPP) refers to physical unit of a factor produced by the employment of an extra unit of a variable factors.
Symbolically, MRP = MPP * MR. Under perfect competition MRP = MPP x price. Average revenue product (ARP) is the revenue earned by the employment of each unit of the variable factor. Under perfect competition, a firm will employ. Various units of a factor up to the point at which the price said to the factor is equal to its marginal productivity.
The producer goes on constantly substituting dearer factors by the cheaper factors till the marginal productivity of different factors become proportional to their prices. The assumptions on which the marginal productivity theory is based are criticized because they are unreal like perfect competition, perfect mobility of factors, homogeneous units of a factor, etc.
The nature and features of the supply of factors like land, labour, capital, and organization are not similar. The higher the remuneration given to the factors, the higher would be their supply. The supply curve of an industry, therefore, for a particular factor will be upward sloping.
Land is a free gift of nature. It is characterized by fixity in supply, immobility, heterogeneity, nil supply price. Its fertility is original and indestructible. Labor is featured by perish ability, heterogeneity, relative immobility etc. Capital is the produced means of production which is characterized by non-permanence, productivity etc.
All producers’ goods are capital. Capital grows our saving. Capital is that which helps further production. All developing countries are labor surplus but capital scarce countries. Poverty has been responsible for the slow growth of capital in all developing countries like India.