The marginal productivity theory of income distribution assumes that factor markets are perfectly competitive.

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The marginal productivity theory of income distribution is based on the assumption of perfect competition in factor markets. It states that each factor of production (e.g. labor, capital) is paid a wage or rent equal to its marginal productivity, which is determined by the intersection of the supply and demand curves for that factor. In perfect competition, the price of a factor is equal to its marginal revenue product, which is the additional revenue generated by each additional unit of the factor. Therefore, the theory assumes no market power or bargaining ability on the part of firms or workers, and that all factors are homogeneous and interchangeable.

The Marginal Productivity Theory of Income Distribution Assumes That Factor