Theory of income distribution

Question 1

Explain the term distribution.

Answer 1

Distribution refers to the study of how total wealth or income generated in an economy is divided.

Question 2

State the 2 approaches for distribution.

Answer 2

Functional distribution of income
Size/personal distribution of income

Question 3

Outline the difference between functional and size/personal distribution of income.

Answer 3

Functional distribution of income refers to how income in an economy is divided among the factors of production, where as size/personal divides their income among individuals and households.

Question 4

The 4 factors of production are:
Land
Labour
Capital
Entrepreneurship
What are their respective rewards?

Answer 4

Rent
Wages
Interest
Profit

Question 5

What is the theory of factor pricing?

Answer 5

The theory of factor pricing states that the interaction between the forces of demand and supply for a factor of production within a particular industry determines its price/factor returns. This also refers to the factor market.

Question 6

Explain derived demand.

Answer 6

Derived demand occurs when demand for a good or service affects demand for a related good or service

Question 7

What is the marginal productivity theory of demand for a factor?

Answer 7

The marginal productivity theory proposes that a profit maximizing firm will demand the factors of production, specifically labour and capital up to the point where marginal revenue gained from employment is equal to the marginal cost of the employment.