Topic 6

THEORY OF DISTRIBUTION AND

CONSUMPTION
 “Market factors in real estate and construction industry
rent, wages, interest and profit, consumption and investment

”
application to real estate investment

.”
WHAT YOU WILL LEARN………..
 What are the types of payment
for these [FOP]
Distribution’ refers to the sharing of the wealth that is produced among the different factors of
production.

RENT WAGES AND

SALARIES

INTEREST PROFIT
Wages
✓Every FOP is rewarded for its services. Wages are the price for the service of labour

✓Wages can be defined as sum of money paid under contract by an employer to an employee for
his/her service. E.g. A private valuer who works with a private valuation company. For his/her
services, the valuer[s] will be rewarded with sum amount of money [ e.g. salary + commission]

✓Nominal wage [refer to the salary in terms of RM]

✓Real wage [ refer to the purchasing power of the money]

 Determination of wages

What determines the wage rate?

1. Market Demand

Demand for Labour comes from the firm which hires workers for
production

Marginal Revenue Productivity [MRP] determines the firm’s demand

curve for labour

MRP = Maximum price the firm will pay for the additional unit of
labour. It also measures the contribution made by the labour for the
firm. The MRP curve is also a demand curve for labour.
 Determination of wages

What determines the wage rate?

2. Supply of labour to a firm

in perfect competition, there are large number of firms and no single firm is able to influence
the price. The price is fixed by the industry. Therefore, the firm has to adjust its demand for
workers according to the existing and given wages rates.
 Determination of wages

What determines the wage rate?

3. Supply of labour to an industry

The market supply curve is positively sloped because higher wages attract more individuals,
whereas lower wage will result in a reduction of individual willing to work
 Determination of wages

What determines the wage rate?

4. Supply of labour for the economy as a whole

The supply of labour for economy depends upon many factors such as working hours, size of
population, social factors, economic factors, mobility of workers, efficiency of workers and
leisure and preferences of workers
 Wage differential

In reality wages differ from one person to another, from place to place, type of occupation. The
difference in wages are contributed by the differences in

1. The demand of labour

2. The efficiency of labour
3. The supply of labour
4. The mobility of labour
5. Experience and education
6. The risk involve in the job
7. Bargaining power
8. Future prospect
 Rent

Rent is defined as the payment for the hire of goods and services. There are different
meanings of rent from the viewpoint of economist.

1. Ricardian theory of rent- rent is that portion of the produce of the earth which is paid to
the landlord for the use of the original and indestructible powers of the soils
2. Modern Theory of Rent- other factors of production besides land can also earn rent.
 Profit

Profit, a reward received by the entrepreneur[s] for his contribution to the production process.
Entrepreneur is a person who takes the initiatives to start a business, organise the business and
employ the FOP

1. Gross profit – the surplus which accrues to a firm when its subtract the total expenditure
from total revenue
2. Net profit- the profit accrues to an entrepreneur for his/her function as an entrepreneur.
That is the end of the lesson for RES415, For that, I thank you for
your participation with this online class. I wish you all the best for
the online test [final exam] and see you guys for other subjects in
the future