Factor Markets - Economics Assignment Help
In economics factor markets, also termed as resource markets refer to the markets where the factors of production are bought and sold, for productive activities. The various factors of production include land, labor, capital, raw materials and management or entrepreneurial resources.
Comparable to most markets, factors markets exchange a commodity for monetary consideration or price. The general term used for the monetary payments is factor payments. Specific factors have specific payments. For labor the payment is wage, for land the payment is rent, for capital the payment is interest and for entrepreneurial services the payment is profit.
Factor Demand is the demand side of the factor market where the relation between the factor prices and the quantity demanded is determined. Generally, lower the price of a factor then the higher the demand for that factor and higher the price the lower the demand for the factor. Demand and price share an inversely proportional relationship. One of the important aspects that has to be considered is the marginal revenue of a factor of production. As the Law of Diminishing Marginal returns states that employing an additional quantity of factor in the production, the marginal revenue product declines and the factor generates less revenue. Ex: in a farm land where only 20 laborers are required, an additional 5 laborers are employed. As the land is limited and also the laborers are sufficient, the employment of additional workers will not increase the production but will increase wage-payout, resulting in a loss to the employer.
Factor Supply is the supply side of the factor market. The factor price and the quantity supplied for a factor is determined in the factor supply study. Generally, the higher price induces an increase in the quantity supplied and the lower the price the lower the supply. Supply and price share a directly proportional relationship. A good example for factor supply is the immigration of working class from developing countries to the developed countries. As in the developing countries the wages and salaries are lower compared to the wages and salaries paid in developed countries, a lot of people immigrate to developed countries.
Factor markets in different market structures:
Monopsony: This market is characterized by a single buyer of the factors of production. The monopsony buyer is a price maker with a complete control over the factors. The price paid by a monopsony is lower than that paid in a perfect competition. The buyer does not allocate the resources efficiently.
Oligopsony: This is a market characterized by a small number of relatively large competitors. Each competitor has a substantial market share and they dominate the prices paid for the factors. There is an interdependence of the competitors and each tend to minimize their cost of production by paying a lesser price to the factor and extracting more from the factors. Oligopoly sellers often act as oligopsony buyers of input.
Monopsonistic competition: This market is characterized by a large number of buyers. Generally, they are small competitors, each with a modest control of the demand in the market. Here, the prices of factors, just like in the monopolistic competition have a little control over the prices.
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