Marginal productivity theory of distribution:

The marginal productivity theory of distribution is a theory of economics that explains how wages and profits are determined in a market economy. According to this theory, the price of a factor of production (such as labor) depends upon its marginal productivity.

Marginal productivity:

Marginal productivity refers to the additional output that is produced by using one more unit of a factor of production. For example, if a factory can produce 100 units of a product with 10 workers, and 110 units with 11 workers, then the marginal productivity of the 11th worker is 10 units.

Factors affecting marginal productivity:

The marginal productivity of a factor of production depends upon several factors, including:

- Technology: The level of technology used in production affects the marginal productivity of labor and other factors of production.
- Education and training: Workers who are highly educated or trained tend to have a higher marginal productivity than workers who are not.
- Capital: The amount and quality of capital used in production can affect the marginal productivity of labor and other factors of production.
- Natural resources: The availability and quality of natural resources can affect the marginal productivity of labor and other factors of production.

How the theory works:

The marginal productivity theory of distribution works as follows:

- Demand for labor: Firms hire workers based on the marginal productivity of labor. If the marginal productivity of labor is high, then firms will be willing to pay higher wages to attract workers.
- Supply of labor: The supply of labor is determined by workers' willingness to work at a certain wage rate. If the wage rate is high, then more workers will be willing to work, increasing the supply of labor.
- Equilibrium wage rate: The equilibrium wage rate is the wage rate at which the demand for labor equals the supply of labor. At this wage rate, firms will hire the optimal number of workers and workers will be willing to work.

Conclusion:

In conclusion, the marginal productivity theory of distribution explains how wages and profits are determined in a market economy. According to this theory, the price of a factor of production depends upon its marginal productivity. Factors affecting marginal productivity include technology, education and training, capital, and natural resources. The theory works by determining the equilibrium wage rate at which the demand for labor equals the supply of labor.

The marginal productivity theory states that under perfect competition, price of each factor of production will be equal to its marginal productivity. The price of the factor is determined by the industry. The firm will employ that number of a given factor at which price is equal to its marginal productivity. Thus, for industry, it is a theory of factor pricing while for a firm it is a factor demand theory.