AP MicroeconomicsFactor Markets
Marginal Productivity Theory of Distribution
The marginal productivity theory of distribution says each factor of production is paid the value of its marginal contribution to output, so firms hire each input until MRP equals its price.
In competitive factor markets, a profit-maximizing firm keeps hiring an input as long as the marginal revenue product (the extra revenue from one more unit) exceeds its marginal resource cost, stopping where MRP = MRC. In equilibrium this means each factor—labor, capital, land—earns a payment equal to the value of what its last unit adds. The theory explains how the total product is 'distributed' among factors and provides the demand side of factor markets, though critics note it abstracts from bargaining power and market imperfections.
Formula / Example
Hire factor until MRP = MRC; in competition each factor earns its marginal revenue product.