Meaning and Types of Distribution

Production is never the work of a single agent — it is the joint outcome of four factors of production working together: land, labour, capital, and entrepreneurship (organisation). Once goods and services have been produced and sold, the total revenue earned must be shared out among the owners of these four factors as their respective factor incomes. Land earns Rent, labour earns Wages, capital earns Interest, and the entrepreneur — who organises the other three factors and bears the risk of the enterprise — earns Profit. The branch of economic theory that studies how the value of the total product (or, at the level of the whole economy, the national income) comes to be divided among these four factors is called the Theory of Distribution.

It is useful to separate two quite different senses in which the word "distribution" is used in economics:

• Functional distribution classifies income according to the FUNCTION performed, i.e. the factor of production that earns it — how much of the total product goes to land as rent, how much to labour as wages, how much to capital as interest, and how much to entrepreneurship as profit. This is the classical, and the older, meaning of the term, and it is the one this chapter is entirely about.
• Personal distribution classifies income according to the PERSONS or households that receive it, regardless of which factor earned it — for instance, what share of national income is received by the richest 10% of households versus the poorest 10%. This sense of distribution is central to the study of income inequality, but it is a separate question from what determines the PRICE of each factor, which is the concern of this chapter.

In the earlier chapters of this book, demand and supply analysis was used to explain how the price of an ordinary COMMODITY is determined. The theory of distribution extends exactly the same demand-and-supply logic one step further: rent, wages, interest, and profit are each, in their own way, the "price" paid for the productive service of a FACTOR of production — the price of the use of land, of labour, of capital, and of entrepreneurial ability, respectively.

Tamil Nadu's Higher Secondary Economics syllabus, like every other Indian board's economics course, builds this chapter on the same core classical and Ricardian principles of distribution theory that are taught across the country — the reasoning developed here is general economic theory, not specific to any one state or board.