Economics Online Tutor

Supply and Demand in the
Factor Markets
Just as a market exists for final goods and services, a market also exists for
the factors of production.

The factors of production are labor, capital, and land.  More information about
the factors of production are included in the "Basics" section of this website.

These factors of production must be hired in their own markets in order to
produce the final goods and services.  These factors have their own markets,
and their own supply and demand curves.

The demand for the factors of production is a derived demand.  The demand
for the factors will be based on the demand for the final goods and services
that they are hired to produce.

The supply of the factors of production will be based on the opportunity costs
for their use.

The prices for the factors of production are known by the names of their
earnings.  The price for labor is the wage rate.  The price for capital is the
interest rate.  The price for land is rent.


Using labor as an example, the demand for labor would be the quantity of
labor hours that producers wish to hire, and would be derived from the
demand for the goods and services being produced.  The supply of labor
would be the number of potential workers who would be willing to work at
each potential wage rate.

Just as in the market for final goods and services, the demand curve slopes
downward and the supply curve slopes upward in the factor markets.
This page, along with additional commentary, was posted on the "Economics Online Tutor"
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