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Supply and Demand in the Factor Markets

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 is 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.

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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.

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