This chapter explained how labor, land, and capital are compensated for the roles they play in the ‘Production process. The theory developed here is called the neoclassical theory of distribution. According to the neoclassical theory, the amount paid to each factor of production depends on the supply and demand , for that factor. The demand, in turn, depends on that particular factor’s marginal productivity. In equilibrium, each factor of production earns the value of its marginal contribution to the production of goods and services.
The neoclassical theory of distribution is widely accepted. Most economists begin with the neoclassical theory when trying to explain how the U.S. economy’s $12 trillion of income is distributed among the economy’s various ‘members. In the following two.chapters, we consider the distribution of income in more detail, As you will see, the neoclassical theory provides the framework for this discussion.
Even at this point, you can use the theory to answer the question that began this chapter: Why are computer programmers paid more than gas station attendants? It is because programmers can produce a good of greater market value than can gas station attendants. People are willing to pay dearly for a good computer game, but they are willing to pay little to have their gas pumped and their windshield washed. The wages of these the market prices of the goods they produce. If people suddenly got tired of using computers and decided to spend more time driving, the prices of v= goods would change, and so would the equilibrium wages of these two groups of workers.