The interaction between the buyers and sellers of a good or service is called a market. Two important economic markets are factor markets and product markets.
The factor market refers to the buying and selling of the factors of production. The factors of production (land, labor, capital, and entrepreneurship) are the resources used to produce goods and services.
Producers offer goods and services for sale in product markets. Individuals spend the money they have earned in the factor market (for instance, wages or the income from selling land) to make purchases in product markets.
Factor Market
- Buys & sells: land, labor, capital, entrepreneurship
- Individuals earn wages, rent, profit here
- Businesses buy resources to produce goods
Product Market
- Buys & sells: finished goods & services
- Producers sell what they made
- Individuals spend their factor-market income here
Market
Any interaction between buyers and sellers of a good or service — not necessarily a physical place.
Factors of Production
The four resources used to make goods and services: land (natural resources), labor (human work), capital (tools/money), entrepreneurship (business organization).
Factor Market
Where factors of production (land, labor, capital, entrepreneurship) are bought and sold. Example: a job market where workers sell their labor.
Product Market
Where finished goods and services are bought and sold. Example: a grocery store where consumers spend their wages on food.