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Home Theory of Factor Pricing OR Theory of Distribution Introduction to Theory of Factor Pricing OR Theory of Distribution

Introduction to Theory of Factor Pricing OR Theory of Distribution:

 

Definition and Explanation of Theory of Factor Pricing:

   

The theory of distribution or the theory of factor pricing deals with the determination of the share prices of four factors of production, viz., land, labor, capital and organization.

 

Four Factors of Production, in Economics:

 

(i) The share of land, is named as Rent.

 

(ii) The share of labor as Wages.

 

(iii) The share of capital as Interest.

 

(iv) The share of organization as Profit.

 

The four factors of production in cooperation with one another produce annually a net aggregate of commodities, material and non-material. This we name as national income. The national income is to be shared among the four factors of production which have contributed to this production. In the theory of distribution, we are chiefly concerned wrath the principles according to which the price of each factor of production is determined and distributed.

 

 In the words of Chapman:

 

"The Economics of distribution or the pricing of factors 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".

 

Distribution is Functional and not Personal. I would like to make it clear that the pricing of factor of production discussed here is functional and not personal. By this we mean that when the reward of each factor is distributed, it is not paid to an individual but to the agents or factors of production. The individual may represent in his person as landlord (if he used his own land), the labor (if he works himself), the capitalist (if he has contributed his capital) and. the entrepreneur (if be organizes the business). The price of land, labor, capital and organization which is termed as rent, wages, interest and profit is in fact their functional income. They are the costs from the point of view of the firm but income from the point of view of factors of production.

 

Why a Separate Theory of Factor Pricing?

 

It is often pointed out that the price of a factor of production is determined, like the price of a commodity, by the equilibrium of forces of demand and supply, If the demand of the particular factor rises, other things remaining the same, its price goes up and vice versa. The other economists who differ with this view are of the opinion that the theory of value is not applicable in its entirety to the pricing of factor of production. They believe that on the side of demand there is similarity between the two, because the value of a particular commodity and the price of a factor of production are governed by marginal utility and marginal productivity respectively. But on the side of supply, much difference exists between them. On the side of supply, the price of a particular commodity is determined by its marginal cost of production. But in ease of labor or an acre of land or a unit capital, it is not possible to ascertain exactly its costs of production. The other dissimilarity between the two is that the supply of a factor of production cannot be readily adjusted as we can do in the case of a commodity. For example, if the demand of a particular type of labor increases or the rent of land rises-up, it will not be possible to increase their supply immediately.

 

In the words of Marshall:

 

"Free human beings are not brought up to their work on the same principle of a machine, a house of a slave. If they were, there would he very little difference between the distribution and the exchange side of value".

 

Thus, we come to the conclusion that though the value of the commodities and the prices of the factors of production are determined by demand and supply yet, due to some differences of the factors of production on the side of supply, there is a need for a separate theory of distribution.

Relevant Articles:

Introduction to Theory of Factor Pricing or Theory of Distribution
Marginal Productivity Theory (Neo-Classical Version)
Firm's Equilibrium in the Factor Market Under Perfect Competition
Modern Theory of Factor Pricing Under Perfect Competition
 

Principles and Theories of Micro Economics
Definition and Explanation of Economics
Theory of Consumer Behavior
Indifference Curve Analysis of Consumer's Equilibrium
Theory of Demand
Theory of Supply
Elasticity of Demand
Elasticity of Supply
Equilibrium of Demand and Supply
Economic Resources
Scale of Production
Laws of Returns
Production Function
Cost Analysis
Various Revenue Concepts
Price and output Determination Under Perfect Competition
Price and Output Determination Under Monopoly
Price and Output Determination Under Monopolistic/Imperfect Competition
Theory of Factor Pricing OR Theory of Distribution
Rent
Wages
Interest
Profits
Principles and Theories of Macro Economics
National Income and Its Measurement
Principles of Public Finance
Public Revenue and Taxation
National Debt and Income Determination
Fiscal Policy
Determinants of the Level of National Income and Employment
Determination of National Income
Theories of Employment
Theory of International Trade
Balance of Payments
Commercial Policy
Development and Planning Economics
Introduction to Development Economics
Features of Developing Countries
Economic Development and Economic Growth
Theories of Under Development
Theories of Economic Growth
Agriculture and Economic Development
Monetary Economics and Public Finance
History of Money

 

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