Theories of Distribution

Theories of Distribution

Introduction
            Of the theories of distribution, the marginal productivity theory of distribution has been the most popular one, having been modified by economists from time to time. But as we shall see below, this theory touches the problem of factor pricing under perfect competition from demand side alone and neglects the supply side.
This modern theory under perfect competition is called generally factor pricing. An absolute thesis of factor pricing should analyse the complexities both from the demand side and the supply side.
            Nevertheless, there are other realistic cases of factor pricing when there is (i) Perfect competition in the factor market and imperfect competition in the product market (ii) monopsony in the factor market and perfect competition and monopoly in the product market and (iii) monopsony in the factor market and monopoly in the product market.
Concepts of Factor Productivity and Factor Cost

1. Concepts of Factor Productivity


1. Physical Productivity
There are two main concepts relating to factor productivity of any factor in terms of goods and services, it is called physical productivity. It is further divide into average and marginal physical productivity.

1. Average Physical Productivity – APP is the physical units produced per unit of the variable factor. It is arrived at by dividing total physical productivity TPP by number of units of the variable factor employed N, i.e.
                                    APP = TPP
                                                  N

2. Marginal Physical Productivity – MPP is the addition made to total output by employing an additional unit of a variable factor.
                                    MPP = TPPn – TPP_n-1

3. Value of Marginal Physical Productivity – VMPP is obtained by multiplying MPP with the price AR of the product.
                                    VMPP or VMP = MPP x Price (AR)
(ii) Revenue Productivity
When we express the productivity of a factor in terms of money, it is called revenue productivity. It is further divided into average and marginal revenue productivity.

1. Average Revenue Productivity ARP – ARP is the revenue obtained per unit of the factor employed. It is obtained by dividing total revenue productivity TRP by the total number of units of the factor employed N i.e.                                    ARP = TRP
                                                     N     
   It is also obtained by multiplying APP with the price of the product.
                                       ARP = APP x Price (AR)
2. Marginal Revenue Productivity (MRP) – MRP is the addition made to total revenue productivity by employing one more unit of  a variable factor i.e.
                        
                                    MRP = TPPn – TPP_n-1

Let us see an illustration which gives the picture of the entire aspects of Factor Productivity.
Illustration 1
The below given tablet presents, Total units of factor Employed, Total Physical Productivity and Price, based on which you have to ascertain the following:

1. Marginal Physical Productivity


2. Average Physical Productivity


3. Total Revenue Productivity


4. Marginal Revenue Productivity


5. Average Revenue Productivity


6. Value of Marginal Physical Productivity

N Value in Units	TPP Value in Units	P (Price)  Value in $
1	10	7
2	30	7
3	43	7
4	55	7
5	74	7
6	80	7
7	80	7

Solution
                           Total, Physical And Marginal Productivity

N Units	TPP Units	MPP Units	APP Units	P In $	TRP In $	MRP In $	ARP In $	VMPP In $
(a)	(b)	(c) =  TPPn – TPPn-1	(d) = (b / a)	(e)	(f) =  (b x e)	(g) =  (c x e)	(h) =  (d x e)	(i) =  (c x e)
1	10	10	10	7	70	70	70	70
2	30	20	15	7	210	140	105	140
3	43	13	14.3	7	301	91	100.1	91
4	55	12	13.75	7	385	84	96.25	84
5	74	19	14.8	7	518	133	103.6	133
6	80	6	13.3	7	560	42	93.1	42
7	80	0	11.42	7	560	0	79.94	0

 

 Association Between ARP and MRP

There is a definite relation between ARP and MRP curves which is based on the Law of Variable proportions. Both ARP and MRP curves are inverted U shaped or bell shaped. First they rise upward, reach maximum and then decline, as it is represented in the below diagram.
                                    

1. When the ARP curve rises, the MRP curve is above it.
2. When the ARP curve is at its maximum, a point M, the MRP curve cuts it from above.
3. When the ARP curve falls, the MRP curve is below it and falls steep.