5.1 Introduction to Factor Markets

Factor Markets

• The theories of supply and demand do not apply just to markets for goods.
• They apply to any market; even markets for financial services like labor and financial investments.
• Labor markets are markets for employees or jobs.
• Financial services markets are markets for saving or borrowing.
• When we think about demand and supply curves in goods and services markets, it is easy to picture who the demanders and suppliers are: Businesses produce the products, and households buy them.
• Who are the demanders and suppliers in labor and financial service markets
• In labor markets, job seekers (individuals) are the suppliers of labor, while firms and other employers who hire labor are the demanders for labor.
• In financial markets, any individual or firm who saves, contributes to the supply of money, and any who borrows (person, firm, or government), contributes to the demand for money.
• Factor prices provide incentives and convey information to firms and factors
  of production.
• Factors of production (labor, capital, and land) respond to factor prices (wages, interest, and rent).
• Employers’ (firms’) decision to hire is based on the productivity of the factors, output price, and cost of the factor
• The quantity of labor demanded is negatively related to the wage rate, while the quantity of labor supplied is positively related to the wage rate in a given labor market, other things constant.