Introduction:

The concept of marginal productivity theory is the heart of this theory of distribution. David Ricardo and Edward west first developed this concept, later on economists like JB Clark, Jevons, wick steed, Walrus, marshal Etc. made valuable contributions and developed it further.

According to this theory a producer employ a factor input because of its productivity. The reward he is prepared to pay for that factor input depends on its productivity. There is a direct relationship between productivity and reward. Higher the productivity, higher would be the reward and vice versa.

The central theme of this theory is that the reward paid to any factor input depends on its marginal productivity. Thus a producer would secure maximum profits when the marginal productivities of all the factors inputs are equalized.

Marginal Productivity Classifies.

1. Physical productivity
2. Revenue productivity

Physical productivity: it refers to the amount of a commodity in terms of physical units which a factor input helps to produce. For ex: a factor unit produces 10 units of a commodity X in a day.

Revenue productivity: when physical productivity is expressed in terms of money then it can be said as revenue productivity. For ex: when a unit of commodity X is sold at RS 5/-then the total revenue productivity would be 10 units *5 rupees, then the total revenue productivity would be 10*5-50.

Physical productivity is classified into two parts:

1. Average physical productivity(APP)
2. Marginal physical productivity(MPP)

APP is obtained by dividing total output by the number of units a factor input employed for ex: 50 /5=10 (units)

MPP refers to the increase in total output resulting from the employment of an additional unit of a factor input keeping all other factor inputs constant hence

   MPP=change in total output/change in factor units employed

   4 units /1

For Ex:10 units of a factor input produces 50 units, 11 units of factor input produces 54 unit then here, MPP is 4 units

Revenue productivity is divided into two parts:

1. Average revenue productivity(ARP)
2. Marginal revenue productivity(MRP)

ARP refers to the total revenue of the output produced by a factor unit divided by the total number of units of that factor employed.

  ARP=total revenue/no. of units of factor of inputs employed

        100/10=10 units     (divide)

MRP refers to of a factor unit is the net addition to the total revenue made by the employment of an additional unit of a factor inputs assuming the quantity of all other factor inputs are kept constant.

      MRP=change in total revenue/change in units of factor inputs employed

12/1 units

For ex: 10 units of a factor input produce goods worth of RS 100/-and it units of the same factor input produces worth of RS 12/- . MRP would be 12 rupees.

The marginal productivity theory states that under the conditions of perfect competition in the long run the reward paid to factor inputs will be equal the ARP and MRP of that factor input.

also read: write a note on liquidity and profitability.