<P> M P L = w / P (\ displaystyle MPL = w / P) here w / P (\ displaystyle w / P) is the real wage rate.At that point the contribution done by the last unit of labor will be just equal to output MPL . Thus one can conclude that the wages paid would be equal to the marginal product of labor . </P> <P> In the classical theory supply and demand for capital determines the optimal interest rates . The rate of interest that is determined by the intersection of investment and saving is the price of investible resource (capital). The demand for capital is done by the entrepreneur for further investment and for the productive purpose . But the productivity of capital is dependent on the law of variable proportion . Which means as more and more of capital is employed the productivity from capital goes on decreasing . Therefore, the entrepreneur will employ only capital up to that level where the rate of interest is equal to the Marginal productivity of capital (MPK). M P K = R / P (\ displaystyle MPK = R / P), where MPK is the marginal productivity of capital and R / P is real rental for capital . It shows that demand for capital is inversely related to rate of interest. There are many other factors which affect the demand for capital . On the other hand, supply of capital is positively related to the rate of interest . As the rate of interest increases the savings increases and vice versa . Thus the entrepreneur will employ the capital where MPK is equal to real price of capital . The optimal rate of interest rate is determined by the intersection of demand and supply curves . If the rate of interest rises above the equilibrium interest rates the demand for the investment will decline and the supply of savings will increase . As there is excess of savings than demand in the economy the market forces will bring the interest rate to the original interest rates. Now, if the interest rates fall below the optimal level then the there is excess of demand than supply in the economy and hence, the market forces will adjust the interest rates . </P> <P> This theory was first developed by the economist David Ricardo; it was called The ricardian theory of rent . Ricardo defined rent as "that portion of produced of the earth which is paid to the landlord for the use of the original and indestructible powers of the soil". However, later on the modern theory of rent was developed by the modern economists . The main difference between the Ricardian theory and this theory was that, Ricardian theory used the difference between surplus enjoyed from superior land to the inferior land . In the modern theory the rent was determined by the demand and supply forces in the market like the other factors of production. Demand for land means total land demanded by the economy as a whole. Demand for land like others depends upon the marginal revenue productivity . Rent paid by the economy will be equal to the marginal revenue productivity which is also subject to law of diminishing returns . this suggests that the demand curve like any other demand curve will be downward sloping.It shows that the demand for land and rent are negatively related . On the other hand, supply of land for an economy is fixed that is it is perfectly inelastic . </P> <P> Profit is another important factor in factor payments . This theory was first developed by Edgeworth, Chapman, Stigler, and Stonier . This theory is also depended upon the marginal revenue productivity . It is also called marginal product and capital demand . Let one consider an example . The main objective of firm is to maximize profit . As we know that profit would be difference between the revenue and costs P r o f i t = P Y − W L − R K (\ displaystyle Profit = PY - WL - RK). Where the revenue would be equal to the price of the good multiplied by the output of the firm P . Y (\ displaystyle P.Y). On the other hand, the costs of the firm include labor costs W . L (\ displaystyle W.L), capital costs R . K (\ displaystyle R.K), rent cost if any. Now if we substitute our production function Y = F (L, K) (\ displaystyle Y = F (L, K)). Then we would see that the profit of the firm is depended on factor prices and factor inputs . P r o f i t = P F (K, L) − W L − R K (\ displaystyle Profit = PF (K, L) - WL - RK). Hence firm would choose the that optimal level of factor inputs that would maximize profit of the firm . </P>

Consider the incomes paid to the factors of production. wages are paid to