Introduction:
1. This theory was developed by Clark, Wickseed and Walras . The Marginal productivity theory of distribution explains how the prices of various factors of production are determined.
2. This theory explains how rent, wages, interest and profit are determined. .
3. This theoiy is also known as “ General Theory of Distribution ” or “ National Dividend Theory of Distribution”.
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 longrun.
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. Each factor is rewarded according to its marginal productivity.
Marginal Product: The Marginal Product is also known as “ Marginal Physical Product “ [MPP]. 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 a 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 × 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.
MRP = MPP × MR
The Marginal Productivity Theory of Distribution states that
1. The price of a factor of production depends upon its productivity.
2. The price of a factor is determined by and will be equal to marginal revenue product of that factor.
3. Under certain conditions the price of a factor will be equal to both the average and marginal products of that factor.
