wages, rent, interest. Factor prices Distribution of national income is determined by factor payments (factor prices). Factor payments include rent, wages, interest and profit. The prices for factor of production depends upon demand and supply of that particular factor of production. Assume that the factors of production in the economy are fixed and hence the factor supply curve is vertical. Equilibrium of factor payments is determined by the intersection of the downward-sloping factor demand curve and the vertical supply curve. The optimal factor payments are determined through their respective markets i.e. the market clearing prices of the factors of production. There are three major factor of production Land, Labor, Capital. Labor market As one knows that the firm will hire only the optimal amount of labor that will maximize profit, this optimal quantity of labor depends upon the marginal product of labor (MPL). The marginal product of labor is defined as the extra unit of output that the firm produces from hiring one extra unit of labor. MPL=F(K,L+1)−F(K,L) The above equation states that Marginal Product of labor is the difference of output produced from one extra unit of labor and the output produced from original quantity of labor. This production function has the function of diminishing marginal product which means that the marginal product of labor decreases as the amount of labor increases, and as the amount of labor increases the production function becomes flatter i.e. diminishing marginal product. Optimal wages for Labor The demand for labor is dependent on the theory of marginal product of labor, which means that the firm compares the extra revenue earned from increased production that results from the added labor which ultimately leads to the higher spending on wages.let us understand with the following example Let denote wages rate that the labor receives.s denote the hours of labor services that household supplies to labor market. Thus the households receives samount of income from providing labor services. Now let d denote the labor services that the firm demands from labor market. Thus the firm pays damount of wage for providing labor services. Quantity produced in the economy will be given by s =d. Thus the firm profit will be given by gross revenue less wage payments. s-d=d-d Now if we increase the labor input it has two effects first the output will increase by the marginal product of labor as extra hour of work is