THEORIES OF DISTRIBUTION

UNIT-5
FACTORS OF PRODUCTION
• KNOWN AS AGENTS OF PRODUCTION/INPUTS
• LAND -RENT
• LABOR-WAGE/SALARY
• CAPITAL -INTEREST
• ORGANISATION=PROFIT
Rent
• Rent (for economic)is the payment made for use of any factor of
production
LAND -RENT
RICARDIAN THEORY OF RENT
• Payment made for the use of original and indestructible
• According to him rent is the surplus left after making payments to all factors
of production like labor and capital powers of the soil
• There are different types of land with different soils and fertility
• Total land supply is fixed/inelastic
• Corn is produced on each type of the land
• Production starts with highly fertile land in the beginning
• When the demand increases ,we go to next fertile land ,them rent arises on
first grade land
Illustration of Rent

GRADE YIELD PER ACRE RENT

S OF (QUINTALS)
LANDS
A 60 60-2=40
B 50 50-20=30
C 35 35-20=15
D 20 20-20=0
Quasi Rent- introduced by Marshall
• It is applicable to all factors of production except to land
• It is a temporary phenomenon
• Quasi rent is rent earned by a factor when there is a sudden increase
in its demand .For example land
• Even if the demand increases, the supply is inelastic in short run
• But elastic in long run
MODERN THEORY OF RENT
• It is applicable to all factors of production
• If we assume that an input can be put into more than one uses, then
the amount of money that an input would earn in its next best
alternative use
• Ex-Car for self use and for hire
 WAGE THEORIES
• Wage may be defined as sum of money paid under contract by an
employer to a worker for services rendered
• Based on certain conditions and terms
• Mainly linked with time factor/duration of the work
• Man hours salary
• Annual package
• Wages are price of labor
• Skilled and unskilled labor
Difference between the Salary and Wage
• Salary is the fixed amount of compensation which is paid for the performance of an employee.
Wage is the variable amount of compensation which is paid on the basis of hours spent in
finishing a certain amount of work.
• Salary is given to the skilled persons who apply their proficiencies in respective fields and
generate the revenues for the firm. Whereas wages are paid to the semi-skilled or unskilled
worker such as carpenter, welder, electrician, etc. who work on hourly basis.
• In the case of salary, the cost incurred is fixed i.e. fixed amount is paid monthly. Whereas in
wages, the cost is variable, because it can vary with the day to day performance of an individual.
• Salary once decided, in the beginning, remains fixed throughout. Whereas in wage system, there
is a wage rate that keeps on changing and an individual is paid on the basis of prevailing wage
rate.
• Salary is generally paid at fixed intervals i.e. monthly. Whereas wages are paid on a daily basis for
the number of hours spent.
• Salary is paid on the basis of the performance of an individual. Whereas wages are paid on
hourly basis i.e. the amount of work done in hours.
• Salary is paid to employees who possess the skills and efficiencies in completing the office
work. Whereas wages are paid to the labours, who are engaged in manufacturing processes
and do the work on an hourly basis.
• Salary is given to those who are engaged in administrative or office work job. Whereas
wages are paid to those, who are engaged in manufacturing processes that require unskilled
or semi-skilled workers.
• A salaried person usually has KRA i.e. key resultant area set for the month on the basis of
which their performance is judged. Whereas the waged person does not have any KRA and is
judged on the basis of hourly work done.
• Salaried persons are not paid additional compensation for any extra hours. Whereas wage
holder does get an additional pay for the extra hours devoted by him.
Wage Theories
• SUPPLY AND DEMAND THEORY
• Demand for labor is dependent principally on its price
• Requires different skills
• It decides the skillset of the labour
• SUPPLY OF LABOUR
• It would be governed by the prevailing wage rate in the market and preference of labour for
leisure
• MARGINAL PRODUCTIVITY THEORY-
Demand for labor is determined by the value of the output of an additional worker
• MP is the addition in total output per unit of change in variable input
• BARGAINING THEORY OF WAGES
• WAGE FUND THEORY
 INTEREST THEORIES
• Interest is the price paid for the use of capital in any market
• It is the price which the borrower of capital has to pay to the lender of the
capital
TIME PREFERENCE THEORY
• An individual reduces the present expenditure, to get more compensation
for future expenses as interest
• Higher preference to present consumption than future consumption
• Uncertainty attached to future, higher the uncertainty greater the
preference for present
• Consumers’ orientation towards age, pleasure and future planning
 Loanable Fund Theory
• Loanable funds are demanded by firms for investment by households
for consumption and hoarding and by governments to finance their
expenditure
Loanable funds can be supplied by
• Central banking system through increasing money supply
• Savings of households
• Dishoarding by way of offereing past accumulated saving and idle
cash balances
• Disinvestment of capital invested in machines and equipmewnt
 Liquidity Preference Theory
• Keynes
• Transaction Motive-motive for holding money to bridge the gap
between receipts and payment is transaction motive
• Precautionary Motive-For unforeseen needs/accidents/old
age/unplanned purchase
• Speculative Motive-it depends inversely on expectation about the
rate of interest of bonds
PROFIT THEORIES
• Revenue-cost=profit
• Accounting Profit
• Economic Profit
• Gross Profit=net Sales Revenue-cost Of Goods Sold
• Net Profit= Gross Profit-indirect Expenses+indirect Receipts
INNOVATION THEORY OF PROFITS
• Schumpeter has proposed this theory
• Innovators make supernormal profits in short run till other firms enter
i to the industry
• Profit is the reward for the innovations
• May be new technology, new resource
• New market opportunity
• New feature, color, design, size, flavor, fragnance,packing,
• If innovator obtains patent for innovation what happens?
REWARD FOR UNCERTANITY
BEARING

• Competition risk
• Market risk
• Risks of technological changes
• Risks of public policy(price control ,foreign trade policy, corporate
taxation)
 MONOPOLY THEORY OF PROFIT

• Monopolist may create artificial scarcity by restricting the quantity of

production
• DIFFERENT TYPES OF MONOPOLY