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Home » Economics Homework Help » Microeconomics Help » Functional-Personal Distribution
Functional-Personal Distribution
The prices of products are determined in different market forms. The pricing of factors of production is the subject matter of this part. The theory of factor of prices is popularly known as theory of distribution. The distribution may be functional or personal. The distribution theory with which we are concerned is the theory of functional distribution. The concept of functional distribution should be carefully distinguished from that of personal distribution. Personal distribution of national income or what is known as “size distribution of income” well known, national income is not equally distributed among various individuals in the country. Some are rich, while others are poor. In fact, there are large inequalities of income between various individuals. Thus the theory of personal distribution studies how personal incomes of individuals are determined and how the inequalities of income emerge. On the other hand, in the theory of functional distribution we study how the factors of production are rewarded for their services or functions performed in the production process.

Factors of production have been classified by economists under four major heads: land, labour, capital and entrepreneur. Thus, in theory of functional distribution the relative prices of these factors of production are determined. The prices of land, labour, capital and entrepreneurship are called rent, wages of labour, and interest on capital and profits of entrepreneur are determined. To be brief, theory of functional distribution means the theory of factor pricing. To conclude, in words of Prof. Jan Pen, “in functional distribution, we are no longer concerned with individuals and their individual incomes , but with factors of production: labour, capital, land and something else that may perhaps best be called “entrepreneurial activity.” The theory of functional distribution examines how these factors of production are renumerated. It is primarily concerned with the price of unit of labour, a unit of capital, a unit of capital, and being an extension of price theory it is sometimes called the theory of factor prices.”

The question that now arises: is it not the functional distribution that determines the personal distribution of national income. Personal distribution of income only partly depends upon functional distribution. How much income an individual will be able to get depends not only on the prices and amounts of other productive factors which he may possess.

Thus the personal income of a landlord depends not only on the rent but also on the amount of land he owns. Given the rent per acre, the greater quantity of land owns, the greater will be his income. Further, the landlord may have lent some money to others for which he may be earning interest. The total income from interest on money will also to his personal income. Thus a person may be getting income from several sources i.e. from the earnings of various factors of production. The earnings from all the sources will constitute his personal income. Thus if our landlord does not do any other work and owns no other factors of production, his personal income will depend on the rates of interest and also on the amount of rent money he has lent out. Thus, “personal distribution relates to individual persons and their income. The way in which that income has been acquired often remains the background.

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