This document discusses theories of factor pricing and distribution. It covers: 1) The significance of factor prices as the prices paid for land, labor, and capital. Factor prices allocate resources and determine incomes. 2) Marginal productivity theory, which states that factor prices equal the marginal productivity of each factor. 3) Modern distribution theory analyzes demand and supply to determine factor prices. Demand for a factor depends on demand for the final product, while factor supply increases with price. 4) Equity in income distribution refers to fair opportunities rather than equal incomes. Income inequality measures uneven income distribution.

1. Topic ::General
Theory of Factor
Pricing

2. Topics that will be discussed:
1.Significance 0f factor pricing
2.Role of factor prices
3.Meaning of distribution
4.Marginal productivity theory

3.  Significance of factor pricing: The price at which the means of
production(that land,labour,capital) are sold.Classical econmist argue that
factor price represent the intrinsic value of the means of production.
 Importance of factor pricing: Factor prices serve as a rationig device
for the utilization of the productive resources.These resources are
allocated among various industries and firms throught the mechanism of
factor prices and these prices facilitate the shitrting of resources from the
less remunarative uses to the more profitable ones.Dynamic society can't
function without this shitrting.

4. Role of Factor Prices:
The factor prices play a key role in the
free enterprise economy.
a) It is Through factor prices the employment level of various
productive resources are determined.
b)The second important function of factor prices is to allocate
the productive resources among the various alternatives
uses.The resources from the less important to the more
important uses.
c)The factor price not only guide the individual frims.They
also brings about the most efficient allocation at the
resources of the community.
d)Since we all are suppliers of one resources factor pricing
determines the incomes of all us.Our respective share in the
national output.

5. Marginal Productivity Theory: Marginal
productivity theory contribute a significant role in
factor pricing.It is a classical theory of factor pricing
that was advocated by a German economist in
1826.
• According to this theory,under perfect
competition.the prices of seruies redered by a
factor of production is equal to it's Marginal
productivity.

6. MAGINAL PRODUCTIVITY CURVE

7.  PRICE FACTOR
 Equilibrium point price is called factor price.
 So, If we want to know price factor, at first know what is
Equilibrium??


 There,,,price paid by businessman to the various factor
of production in the form of rent,wages,interest etc are a
major determinant of money incomes.

8. Determination of a factor price

9. Equilibrium under perfect
Competetion:::::

Two condition must be
satisfied,viz::
1). MRP=MFC
2) MRP curve must cut the
MFC curve from above.

10. Equilibrium Under Perfect
Competition

11. Profit or Loss Under Perfect
Competition Market

12. Modern Theory Of Distribution
THE MODERN THEORY OF FACTOR PRICE WHICH
PROVIDES A SATISFACTORY EXPLANATION OF
FACTOR PRICES IS THE DEMAND AND SUPPLY
THEORY.WE SHALL NOW ANALYSE THESE TWO
ASPECTS DEMAND & SUPPLY.THE PRICE OF A
COMMODITY IS DETERMINED BY THE DEMAND FOR,
AND SUPPLY OF, AA COMMODITY, SIMILARLY THE
PRICE OF A PRODUCTIVE SERVICE ALSO IS
DETERMINED BY DEMAND FOR, AND SUPPLY OF,THAT
PARTICULAR FACTOR.WE SHALL NOW ANALYSE
THESE TWO ASPECTS, I.E DEMAND & SUPPLY.

13. Demand Side
About the factor demand we should
remember two things :
(a) Demand for a factor is not a direct
demand but it is an indirect demand
(b) The demand for it is a jointly
interdependent demand.

14. Demand for a Factor

15. Supply Side
 The supply curve of a factor of
production depends on various
conditions governing its supply. The
supply a general rule that if the price of
factor increases, its supply also increase.


16. Value: The price of a product and distribution determines
the share of the factors of production in the national output.
Theory of Distribution: Distribution theory states that input
to production-whether capital or labour-will continue to be
added until the value of it's marginal product(the revenue or
yield resulting from the input) is equal to the cost of the
input.That is,the reward of a factor of production is
determined by it's marginal productivity.

17. • The value of the marginal product of a factor depends on the value of
the product that it produces.obviously,higher the price of the product,the
higher will be the value of the marginal product of the factor that
produces it,Greater will be it's reward or the income.

18. Theory of Production:
• Production theory is the study of production, or the economic
process of converting inputs into outputs. Production uses
resources to create a good or service that is suitable for use, or
exchange in a market economy. production is measured as a
“rate of output per period of time”.
• In theory of distribution, determines the share that goes to a
factor of production out of the national output. It can be easily
seen that the greater the share of a factor of production, the
better will be his standard of living and greater his efficiency in
production . The more efficient the factors of production, the
higher will be the national income.

19. Transfer Earnings
 Amount of money that a factor of production (capital
,labur,land) must earn to prevent being transferred from
its present employment to another .
 In Benham 's words ,"The amount of money which any
particular unit could earn in its best paid alternative use
is sometimes called its transfer earnings ".

20. Equity in Income Distribution
 Equity in the distribution of income means that the
distribution is fair and just ,and is more concerned
with equal opportunities rather than equality in the
distribution of income .
 Income inequality refers to the extent to which
income is distributed in an uneven manner among a
population .

21. Remedies
There are two broad remedies :
(a) Via Administered Prices
(b) Via Resources Redistribution

22. Topics :
 1. Production exhaustion problem or
adding up – problem.
 2. Impact on technological progress on
relative factor shares.

23. S
W
O
Y
M
MP
XL
Amount of Labur
Marginalproductivityoflabour
1. Production exhaustion problem or adding up –
problem.
a MP
Y
T
R
O
K X
N
b
Amount of capital
Marginalproductivityofcapital
Figure : A Figure : B
Interest
Interest
Wage bill
Wage bill