There are two types of markets where factors of production (such as land, labor, and capital) and products are bought and sold. These are:
- Factor Market
- Product Market
Factor Market
Factor markets allocate the factors of production to the owners of businesses. It’s a place where the factors of production are bought and sold. These factors can be labor, real estate, crude oil or machinery used to produce final goods. In the factor market the labour and land is provided by the consumers to firms and capital goods such as machinery are provided by other firms. Firms are generally the buyers in factor markets.
Product Market
This is the place where finished goods and services are bought and sold. Examples include grocery stores, accounting services, liquor, and new car dealers.
The consumers earn income from the factor markets and use this income to purchase goods and services in product markets.
Some companies produce goods that are used as an input in the production of other final products. Such goods are called intermediate goods. For example, some car manufacturers buy engines that are intermediate goods from other producers. Similarly, sugar when sold directly to consumers via a grocery store is a final good. However, when sugar is used by a chocolate manufacturer, it’s an intermediate good.
Financial Markets
Apart from factor markets and product market, we also have the financial markets that channel savings from individuals and firms having surplus money to those needing more funds. This is the place where firms raise money through equity and debt.