A factor market is where materials or factors essential to the production process are bought and sold, including labor, commodities, and management resources. Demand drives the relationship between factor markets and markets that supply finished products, with competition for the highest quality materials and labor.
A factor market is a type of market where materials or factors essential to the production process are bought and sold. Markets of this type include products that are directly and indirectly associated with the creation and delivery of finished products to consumers. From this perspective, it is possible to view labor markets, markets that buy and sell commodities, and even markets that trade in management resources as part of the larger factor market.
Demand is a powerful driver of any market situation and helps determine the relationship between these types of markets and the markets that supply finished products purchased by consumers. For example, buyers and sellers of automobile engine parts will base their production on the demand for their products from automobile manufacturers. Automakers in turn produce vehicles in response to anticipated trends in consumer demand for specific makes and models of automobiles. When automakers identify an increase in demand for their cars, they in turn increase their demand for the parts and components needed to make those cars, a move that increases activity in that sector of the factor market as suppliers look to meet that increased demand.
All types of factors are accounted for in various sectors of a factor market. Along with the parts and components required for manufacturing, labor is also an important segment of this type of market. The work may focus on skilled personnel who are directly involved in assembling or creating products, such as assembly line employees at an automobile factory. At the same time, the job can take the form of those in supervisory or management roles, helping to keep the structure running and revealing the products that consumers ultimately buy. This means that a factor market includes labor that is directly related to the production process, but it can also include labor that is indirectly related to but still needed by the whole operation.
As in most market situations, competition within the factor market can be significant. Manufacturers typically aim for the highest quality raw materials while attempting to get those materials at the lowest cost per unit possible. The same is true for labour, as manufacturers will seek to hire people who are highly competent at their jobs but who can be employed for the lowest pay and benefits the market will allow. For this reason, factor market participants will seek to get the best deals overall, often by extensively comparing different factors or products before making a decision.
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