What do Households do in the Factor Market?

What are the Factors of Production in the Household? What are the Types of Factor Market? What Happens in the Factor Market? What is a Marginal Cost?

The factor market is where the business buys the items needed to produce goods and services. The household business includes capital, land and natural resources. A factor market is a kind of market called an input market where you can rent, hire or purchase resources based on your need for production. We would further see what do households do in the factor market and what occurs in the factor market.

1. What do Households do in the Factor Market?

The factor market has a mixture of goods and services which forms a closed loop for the flow of money. Household gives labour to companies and in return, they pay wages to buy goods and services from companies. The commodities and services drive the factor market. When consumers demand more goods and services, the business increases their purchase of the resource which is used to make goods and services. We hope, the answer to what do households do in the factor market is clear now. (See What is Production Concept in Marketing?)

2. What Occurs in the Factor Market?

As we know that the price of the finished products depends on the market factor which is demand vs supply, i.e., when the necessity or commodity demand increases, its supply falls. The factors of production always depend on the demand for the finished products. The demand of the factors of production is considered when the demand depends on the need for another item. (See What is POI in Trading?)

3. How do Households and Firms Interact in the Factor Market?

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Take a look at the following to know how do households and firms interact in the factor market:

  • Households swap income for goods and services. Businesses are, therefore, about sellers in the market who sell goods and services.
  • Every household uses its income to buy goods and services which is manufactured and sold by businesses. However, the firms sell the commodity for money which generates revenue for them.

4. What is the Difference between the Good Market and the Factor Market?

A factor market and a good market are very different from each other. If the factor market trades the inputs in production, the goods market trades the output of production. So, what do households do in the factor market? Well, on the other hand, households are mainly the sellers in the market for resources.

The household and companies are reversed in both markets. The household supplies the factors of production to the company. They receive money and they can use it to buy goods and services from companies in the goods market. (See Who Receives the Goods and Services Produced?)

5. What are the Examples of Factor Market?

Examples are: 

  • The labour exchange for job posts.
  • Websites that include jobs for job seekers.
  • The real estate agents who vacate offices for rent. 

6. How does Monopoly in Factor Markets works?

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A monopoly market is the form of the market which occurs and affects the factor markets. It is a position where there are only one seller and multiple buyers in a factor market. The prices of the resources are very high. The producers will charge higher for the goods and services which is purchased by end users in a monopoly situation. The prices can affect the demand for the finished product. The demand for the factor resources can increase, which may affect the monopoly selling the factor resources. (See What is Accounts Receivable with Recourse?)

7. What are the Types of Factor Market?

Capital is used in the factors of production to produce goods and services. These resources, therefore, are called the factors of production. The main factors are labour, capital, land and entrepreneurship. There are three different types of factors of production that we know and they are: 

  • Labour Market – The labour market is traded on a contract which is called a job. Some jobs are on a daily basis which is called casual labour. Human capital is a distinct skill that is gained from education, experience and training. The price of labour is estimated based on their wages.
  • Capital Market – Capital is the fund that the business use as a loan or investment to buy and sell its commodities. The people lend and borrow to finance the purchase of goods. The price paid is the interest rate.
  • Land Market – It has all the natural resources like gas, water and mineral. 

8. What is an Economic System?

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The economic system is a means by which societies or governments create and give the available resources, services and goods in a geographic region. The economic system balances the factors of production which include land, capital, labour and other physical resources. The economic system circles many institutions, agencies and entities. (See How is Demand used in Economics?)

9. What is the Marginal Cost?

Marginal cost refers to the extra cost to produce the additional unit. For instance, it might cost $10 to make 10 cups of tea. If we make another cup of tea, it will cost $0.80. This is called marginal cost which is the additional cost to produce one extra unit of output. 

There are two cycles in the economy, and they go in different directions. We see the flow of goods and services from consumers to businesses in one direction and back again in the other. This illustrates the notion that we produce goods or offer services people want while working. Contrarily, we observe the flow of cash from businesses to households and the cycle continues. This demonstrates how we earn money through the job we do and receive payment for the items we desire. This was the concept behind the household’s producing factors and we hope you are clear on what do households do in the factor market. (See What is Scarcity and Choice in Economics?)

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