What is a Factor Market?

A factor market is a type of market in which the materials or factors that are essential to the production process are bought and sold. Markets of this type encompass products that are directly and indirectly associated with the creation and delivery of finished products to consumers. From this perspective, it is possible to consider labor markets, markets that buy and sell raw materials, and even markets that transact resources for management as part of the larger factor market.

Demand is a powerful driver of any factor market situation, and helps to determine the relationship between these types of markets and the markets that provide finished goods that are bought by consumers. For example, buyers and sellers of automobile engine components will base their production on the demand for their products from automakers. Automakers in turn produce vehicles in response to anticipated trends in consumer demand for specific makes and models of cars. When the automakers identify an increase in demand for their cars, they in turn increase their demand for parts and components necessary to manufacture those cars, a move that increases activity in that sector of the factor market as suppliers seek to meet that increased demand.

All sorts of factors are accounted for in various sectors of a factor market. Along with parts and components needed in production, labor is also an important segment of this type of market. The labor may focus on trained personnel that are directly involved in the assembly or creation of products, such as employees on the assembly line at an automaker’s factory. At the same time, the labor may take the form of those who function in supervisory or managerial roles, helping to keep the facility operating and turning out the products that consumers ultimately buy. This means that a factor market does include labor that is directly connected with the production process, but may also include labor that is indirectly connected but still necessary to the overall operation.

As with most market situations, competition within the factor market can be significant. Producers typically aim for the highest quality in raw materials while attempting to obtain those materials at the lowest cost per unit possible. The same is true with labor, in that producers will seek to employ people who are highly proficient with their work but can be employed for the lowest pay and benefits that the marketplace will allow. For this reason, participants in the factor market will seek to secure the best deals overall within the market, often comparing different factors or products in-depth before making a decision.