Study Economics notes on Theory of Distribution for Secondary. Useful for revision, homework, and exam preparation in Zimbabwe.
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THEORY OF DISTRIBUTION
The term describes an economic theory that explains how the national income is divided up or shared among the factors of production (FOP) used to produce it.
Alternatively it is called:-
- price theory
- It means the theory explains how the prices (rewards) of F.O.P. are determined using the free forces of demand and supply.
- Marginal revenue product theory
- It means the theory use marginal products of F.O.P. to explain the F.O.P's dd curve.
Theory of distribution involves factors of production and determination of their rewards
Factor of production | Reward
Entrepreneurship | Profit
Land | Rent
Capital | Interest
Labour | Wages/Salaries
THE DEMAND FOR FACTORS OF PROUCTION
- Emphasis in this topic shall be on labour.
- ALL F.O.P. have a DERIVED DEMAD.
- It means F.O.P. are demanded not for their own sake, but for what they produce.
- In other words it means we dd factors of production not for direct consumption e.g. people demand bread for bread itself but dd for land because they want wheat, buildings or other goods or services from land.
- Capital (machinery, raw materials, equipment) is not demanded for its own sake but because of the demand for the products that it helps produce.
- There is a very strong relationship between the market for a F.O.P. and the market for what it produces.
MARGINAL REVENUE PRODUCTIVITY THEORY
- It is additional revenue a firm obtains from selling additional product (marginal product) of an additional F.O.P.
- MRP is as a result of two components.
(i) Physical component
- It is the marginal physical product (MPP).
- It is output measured in terms of physical units produced by an additional F.O.P (extra output).
- For example 15 chairs, 25 tonnes of maize.
(ii) Value component
- It is MPP expressed in terms of monetary values.
- $\mathrm{MRP}=\mathrm{MPP}$ multiplied by the price $(\mathrm{MRP}=\mathrm{MPPxP})$ at which each unit is sold.