Factor Market

 A factor market is a marketplace for the services of a factor of production. A factor market facilitates the purchase and sale of services of factors of production, which are inputs like labor, capital, land, and raw materials that are used by a firm to make a finished product. A factor market is distinct from the goods and services market, which is the market for finished products or services.

For example, in the appliances market, the market for refrigerators and dishwashers would be the goods market. The market for workers who are skilled in refrigerator and dishwasher assembly would be an example of a factor market. Another example of a factor market would be the market for raw materials like steel and plastic, which are two of the materials used for refrigerators and dishwashers.

Factor Pricing:

Factors of production can be defined as inputs used for producing goods or services with the aim to make an economic profit. In economics, there are four main factors of production, namely land, labor, capital, and

enterprise. The price that an entrepreneur pays for availing the services of these factors is called factor pricing. An entrepreneur pays rent, wages, interest, and profit for availing the services of land, labor, capital, and enterprise respectively. The theory of factor pricing deals with the price determination of different factors of production.

The determination of factor prices is always assumed to be similar to the determination of product prices. This is because in both cases, the prices are determined with the help of demand and supply forces. Moreover, the demand for factors of production is similar to the demand for products. However, there are two main differences on the supply side of factors of production and products. Firstly, in the product market, the supply of a product is determined by its marginal cost of production. On the other hand, in the factor market, it is not possible to determine the supply of factors on the basis of marginal cost.

For example, it is difficult to ascertain the exact cost of production for factors, such as land and capital. Secondly, the supply of factors of production cannot be readily adjusted as in the case of products. For instance, if the demand for land increases, then it is not possible to increase its supply immediately.

There are two aspects of each factor of production, which are as follows:

i. Price Aspect: Refers to the aspect in which an organization pays a certain amount to avail the services of factors of production. For example, wages, rents, and interests constitute the price of factors of production.

ii. Income Aspect: Refers to another aspect in which a certain amount is received by a factor of production. For instance, rents received by a landlord and wages received by labor constitute the income generated from the factors of production. Generally, it is assumed that factor pricing theory is similar to product pricing theory.

However, there are differences in the nature of demand and supply of factors of production with respect to that of products. The demand for factors of production is derived from demand, while demand for products is direct demand. Moreover, the demand for the factors of production is joint demand. This is because a product cannot be produced using a single factor of production. On the other hand, the supply of products is closely related to the cost of production, whereas there is no cost of production for factors. For example, there is no cost of production for land, labor, and capital. Therefore, factor pricing is separated from product pricing.