In its purest form, a market economy answers the three economic questions by allocating resources and goods through markets, where prices are generated. The payment to entrepreneurs who start or own businesses The payment firms make to households in exchange for capital The payment firms make to households in exchange for land The payment firms make to households in exchange for their labor Where firms supply goods and services to households in exchange for moneyĪ system of allocating the means of production and the goods and services produced in an economy Where households supply land, labor, capital, and entrepreneurship/technology to firms in exchange for money The owners of resources-supplied to firms in the resource market-and the buyers of goods and services-demanded from firms in the product marketīusiness entities that demand land, labor, and capital from households in the resource market and produce goods and services, which they supply to households in the product market Perfect competition in the capital market means the loanable funds market is in equilibrium, providing the highest overall quantity of loans and price efficiency.A place where buyers and sellers meet to engage in mutually beneficial, voluntary exchanges of goods, services, or productive resources Similar market forces apply to the other factors of production such as capital. If the quantity of workers or wages changes, the market will only decrease in overall utility. Perfect competition in the factor market provides the highest total quantity of workers and at a decent wage as the market can handle. If the market has perfect competition, then the supply and demand of shoemakers will be equal at an efficient quantity and wage. This will actually make the firms more money in the short run, but in the long run, can hurt demand if unemployment is high. Resulting in underpaid labor wages and high unemployment. If the supply of shoemakers exceeds the demand for shoemakers, then a surplus will occur. If there is imperfect competition in the shoemaker labor market, then one of two things will occur:A shortage of laborers workers will force firms to pay an inefficiently high price, reducing total output. Figure 2 below will help you remember the difference between the two. Therefore, the main difference between the factor market and the product market is that the factor market is where the factors of production are traded, whereas the product market is where the outputs of production are traded. Entrepreneurship is a unique resource because unlike the first three factors explained, it is not found in factor markets that can be easily identified.įigure 1 below illustrates the four main factors of production in economics.Īs you can see, factors of production are all used by the firms, not the households. For instance, workers with advanced degrees are in higher demand compared to those with regular degrees.Įntrepreneurship - This refers to the creative or innovative efforts in combining resources for production. Today, advancements in technology have made human capital more relevant. Human capital is just as important as physical capital since it represents the value of the knowledge and experience a worker possesses. Human Capital - This is a more modern concept and entails enhancements in labor as a result of knowledge and education. Examples of physical capital are hand tools, machines, equipment, and even buildings. Physical Capital - This is often simply referred to as “capital”, and mainly includes man-made or manufactured resources used in production. Labor - This simply refers to the work human beings do.Ĭapital - Capital is categorized into two main parts: In other words, these are resources that are not man-made. Land - This refers to resources that are found in nature. Let's briefly introduce each factor of production. So what do these factors entail? Though these are factors of production, they belong to the factor market and not the product market. The four main factors of production in economics are labor, land, capital, and entrepreneurship. Price Determination in a Competitive Marketįactors of production are traded in factor markets at factor prices.Market Equilibrium Consumer and Producer Surplus.Determinants of Price Elasticity of Demand. Cross Price Elasticity of Demand Formula.Effects of Taxes and Subsidies on Market Structures.Monopolistic Competition in the Short Run.Monopolistic Competition in the Long Run.Behavioural Economics and Public Policy.
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