Factor market is a market where sellers and buyers transact production factors such as land, labor, and capital. In this market, businesses are the buyer, while the households are the seller. Companies buy services from households for inputs they use, e.g., labor in producing goods and services. As compensation, households receive the money they can use to purchase products and services.
Sometimes, transactions involve third-party. For example, in the labor markets, labor unions represent workers in negotiates wages with employers or groups of employers. For workers, such collective bargaining increases their power over the negotiated wage.
Difference between the goods market and factor markets
Factor markets are markets for input (resources) that companies use in the production process. Some examples are the labor market, the raw material market, and the physical capital market.
Factor markets differ from the goods market. If the factor market trades production inputs, the goods market trades output of production.
The roles of households and companies are also reversed in both markets. The household supplies the factors of production to the company. As compensation, they receive money, which they can use to buy goods and services from companies in the goods market.
Conversely, in the goods market, households are buyers of the company’s goods and services. The company then uses sales revenue to buy inputs in the factor market.
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In economics, the interaction between households and companies is illustrated by the circular flow model. The model illustrates the flow of goods, services, and money between the two.