ECONOMICS

EASWARI ENGINEERING COLLEGE
DEPARTMENT OF MANAGEMENT STUDIES

ECONOMIC ANALYSIS FOR BUSINESS
Topic: Factor market and interaction between factor market and product
BATCH NO 1
presentation by
Bharanitharan.R
& Team
WHAT IS FACTOR MARKET ?
A factor market is a market in which companies buy the factors of
production or the resources they need to produce their goods and
services.
Companies buy these productive resources in return for making
payments at factor prices.
A factor market refers to the employment of factors of production, such
as labour, capital and land.
 This market is also referred to as the input market.
EXAMPLES OF FACTOR MARKETS
• Factor markets are everywhere. In the appliance manufacturing

industry, the market for workers who are skilled in refrigerator and
dishwasher assembly would be examples of a factor market.
• Similarly, the market for raw materials like steel and plastic which are
two of the materials used for refrigerators and dishwashers are also
considered examples of a factor market. In the modern world, job search
websites and apps are also considered examples of a factor market.
FACTOR MARKET DEPENDS ON
LAND MARKET LABOUR MARKET CAPITAL MARKET

Land consists of all In this market, human Capital is the funds that
the resources given to resources are traded. firms use to buy and
Most labor is traded operate their production
us by nature. It process. In this market,
included natural gas, on a contract, called a people lend and borrow to
water, mineral, etc. job. The price of labor finance the purchase of
is wage rate capital goods. The price of
capital is interest rate.
DERIVED DEMAND
Demand for a factor of production is a derived demand – derived from a firm’s
decision to supply a good in another market.
It is called as derived demand because it is derived from the demands of goods/
services.
ASSUMPTIONS
1. We assume all markets are competitive.

• The typical firm is a price taker
 in the market for the product it produces
 in the labor market
2. We assume that firms care only about maximizing profits.

 Each firm’s supply of output and demand for inputs are derived
from this goal.
MARGINAL REVENUE OF LABOR
AND VALUE MARGINAL PRODUCT
Marginal revenue of Labor Value marginal product

• It is defined as the ratio of the increase •• It is defined as the product of the price
in the amount of output from an of the the output and marginal product
additional unit of labor. of the labor.
• VMP = price of the output X marginal
where physical product of labour
• ∆Q = change in output
• ∆L = change in labor
FACTORS DETERMINING
DEMAND FOR LABOUR
Price of the output
As the value of marginal product (or MRP) decreases (as the quantity of a factor increases),
there is a simple rule for maximizing profit:
 Hire/buy the factor up to the point at which the value of marginal product (MRP) equals
the factor price (MRC)
 This is known as Marginal Productivity Theory of Resource Demand
Marginal Resource Cost (MRC)=
∆ in Total Resource Cost divided by ∆ in factor quantity
Marginal Revenue Product (MRP) =
∆ in Total Revenue divided by ∆ in factor quantity
Labor productivity
LABOR MARKET EQUILIBRIUM
• DEMAND IS LESS  Unemployment  Increase in wages
DEMAND IS MORE  More employment  Decrease in wages
SUPPLY OF LABOR:
Preference for leisure
Size of adult population
Marginal physical product employee demanded VMP

It is an upward slope curve.
APPLICATIONS OF FACTOR MARKET
Government policies
Unemployment
Recession
International wages differences
To determine fringe benefits
DIFFERENCE BETWEEN PRODUCT AND FACTOR
MARKET
INTERACTION OF PRODUCT AND FACTOR
MARKETS
Example – mobile phones and

lithium batteries
Increase in demand for product
leads to increased demand for
factors of production
INTERACTION OF PRODUCT AND FACTOR
MARKETS
If firms employ more workers and

pay higher wages, then this leads to
Increase in demand for labor an increase in household income.
(factor market) leads to increased This enables them to purchase more
demand for products. goods and services. It represents a
circular flow of income.
EFFECTS OF PRODUCT MARKET
DISTORTIONS ON FACTOR MARKETS
• Ceteris paribus, the protection of capital-intensive industries will raise the price of capital
relative to the price of labor. But protection will also reduce demand for imports and cause
the exchange rate to appreciate (a unit of domestic currency will buy more foreign
exchange).
• when the exchange rate is 100 pesos to the dollar under free trade and an average tariff of 50
percent necessitates a 20 percent appreciation of the currency in order to ensure balance-of
payments equilibrium. Now, under an exchange rate of 80 pesos to the dollar, tariff
exemptions on capital goods will mean that capital goods cost 20 percent less under
protection than under free trade.
THANK YOU
Presentation on factor market and interaction between factor
market and product market done by
Bharanitharan.R
Hariharan.B
Gokulakrishnan.E
Jayakrishna.A.R
Arunprakash.N
Kishore.S
Jaganathan
Gowri Shankar

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EASWARI ENGINEERING COLLEGE

DEPARTMENT OF MANAGEMENT STUDIES

• Factor markets are everywhere. In the appliance manufacturing

LAND MARKET LABOUR MARKET CAPITAL MARKET

1. We assume all markets are competitive.

2. We assume that firms care only about maximizing profits.

Marginal revenue of Labor Value marginal product

Marginal physical product employee demanded VMP

Example – mobile phones and

If firms employ more workers and

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