Scribd
Upload
742 views2 pages

Marginal Productivity Theory of Distribution

Marginal Productivity Theory of Distribution proposes that factors of production are paid according to their marginal productivity. Specifically: 1) The price a firm pays for a factor is determined by the marginal revenue product of that factor. 2) Firms will employ factors up to the point where the price paid equals the marginal revenue product, as this maximizes profits. 3) Under certain conditions like perfect competition, the price paid will also equal the average and marginal physical products of a factor.

Uploaded by

Priya Manna
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
742 views2 pages

Marginal Productivity Theory of Distribution

Marginal Productivity Theory of Distribution proposes that factors of production are paid according to their marginal productivity. Specifically: 1) The price a firm pays for a factor is determined by the marginal revenue product of that factor. 2) Firms will employ factors up to the point where the price paid equals the marginal revenue product, as this maximizes profits. 3) Under certain conditions like perfect competition, the price paid will also equal the average and marginal physical products of a factor.

Uploaded by

Priya Manna
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 2

Marginal Productivity Theory of Distribution

Introduction :
Marginal Productivity Theory of distribution was developed by Clark, Wickseed and Walras. This
theory explains how the prices of various factors of production are determined. This theory
explains how rent, wages, interest and profit are determined. This theory is also known as
“General Theory of Distribution” or “National Dividend Theory of Distribution”.

Assumptions :
This theory is based on the following assumptions:
1. All the factors of production are homogenous.
2. Factors of production can be substituted for each other.
3. There is perfect competition both in the factor market and product market.
4. There is perfect mobility of factors of production.
5. There is full employment of factors.
6. This theory is applicable only in the long-run.
7. The entrepreneurs aim at profit maximization.
8. There is no government intervention in fixing the price of a factor.
9. There is no technological change.

Explanation of the Theory :


According to the Marginal Productivity Theory of Distribution, the price or the reward for any
factor of production is equal to the marginal productivity of that factor. In short, each factor is
rewarded according to its marginal productivity.

Marginal Product :
The Marginal product of a factor of production means the addition made to the total product by
employment of an additional unit of that factor. The Marginal Product may be expressed as
MPP, VMP and MRP.

1. Marginal Physical Product (MPP) :


The Marginal Physical Product of a factor is the increment in the total product obtained by the
employment of an additional unit of that factor.

2. Value of Marginal Product (VMP) :


The Value of Marginal Product is obtained by multiplying the Marginal Physical Product of the
factor by the price of product.

Symbolically : VMP = MPP x Price

3. Marginal Revenue Product (MRP)


The Marginal Revenue Product of a factor is the increment in the total revenue which is
obtained by the employment of an additional unit of that factor.
Symbolically : MRP = MPP x MR

Statement of the Theory

An employer employs a factor of production because it is productive. So, the price he wants to
pay for the factor depends upon its productivity. The greater the productivity of a factor, the
higher will be its reward. If the price of a factor of production is less than its marginal revenue
product, the employer will use more of this factor, because his profit will be increased.
When more of a factor is employed, its marginal revenue product diminishes. But the employer
will gain by using additional units of the factor until the marginal revenue product of the factor is
equal to its price. The employer’s profit will be maximum at this point. Beyond the point, the
marginal revenue product is less than the price of the factor. Hence, the employer will suffer loss
when he uses more of the factor. Therefore, the conclusion is that the employer will adjust the
price of the factor of production so as to equalize the marginal revenue product of that factor.

In short, the Marginal Productivity Theory of Distribution states that :


a. The price of a factor of production depends upon its productivity.
b. The price of a factor is determined by and will be equal to the marginal revenue product
of that factor.
c. Under certain conditions, the price of a factor will be equal to both the average and
marginal products of that factor.

Criticisms :

This theory is subject to a few criticisms :


a. In reality, the factors of production are not homogenous.
b. In practice, factors cannot be substituted for each other.
c. This theory is applicable only in the long–run. It cannot be applied in the short-run.

You might also like