factor market and THEORY OF DISTRIBUTION

Payment of Factors of Production

THe theory of distribution explains the rewards paid to the factors of production . The four factors and their rewards are shown in Table 9.1 .

Factors of production              Payment / Rewards
- labour            - wagfes and salaries
- land              - rent
- capital            - Interest
- Entrepreneuir          - profit


There is a need for a separate theory to ecxplain the pricing of services of factors of production because of certain condition that influence demand and supply .
The demand for factors of production differs from demand for goods in two ways .

1) Derived Demand
  THe demand for goods is direct demand whereas the demand for factors of production is derived demand . A derived demand is defined as a demand for an input not for itself but for use in the production of other goods and services . Factors of production are demanded by business firms for their productivity .

2) Joint Demand
Demand for factors of production is joint demand because production needs more than on e factor of producion .
  THe supply of goods also differs from the supply of factors of production . The supply price of goods depends on the amrginal cost of production . However , the supply condition for factors of production is different . For example , land is a gift of nature , which has no cost of production .