Q.Explain how rent element can exist in the earnings of any factor of production. Or Discuss how wage rate is determined by the marginal productivity of labour.

Economic rent is the surplus of a factor's actual earnings over its transfer earnings and can arise for any scarce factor; wages are set where the wage rate equals the marginal revenue product of labour.

Rent element in the earnings of any factor. 'Transfer earnings' of a factor is the minimum payment it must receive to keep it employed in its present use — essentially what it could earn in its next best alternative use (its opportunity cost). 'Economic rent' is the surplus a factor earns OVER AND ABOVE its transfer earnings:

Economic rent = Actual earnings − Transfer earnings

Classical economists associated rent purely with land, because land's total supply is fixed (perfectly inelastic), so ALL of land's earnings above zero can be regarded as a rent-like surplus. But modern economics recognises that a similar rent element can arise in the earnings of ANY factor — labour, capital, or entrepreneurship — whenever its supply is scarce or inelastic relative to demand in a particular use, even if only temporarily. For example, a star performer or a highly specialised skilled worker may earn far more than the minimum needed to retain their services, simply because very few people can supply that particular skill; this surplus is a rent element (often called 'quasi-rent' when it arises from a factor whose supply is fixed only in the short run).

Or — wage determination by marginal productivity of labour. Under this theory (applicable to a firm in a competitive labour market): …