After you have worked through this section of the learning unit, you should be able to:
- describe the factor market and the goods market
- describe the role of households and firms in these markets
Simple circular flow model with two participants and two markets
The factor market is the market in which the factors of production are bought and sold. It is through this market that households supply businesses with the factors of production, in exchange for an income in the form of wages and salaries, interest, rent and profits.
Two active participants in this market are households, as the suppliers of factors of production, and firms, as the demanders of the factors of production. The factor market includes the labour market as well as the market for capital.
There are literally thousands of different producers of goods and services and millions of different consumers of these goods and services in the economy. In macroeconomics, all these different markets for goods and services, which include both the producers and the consumers, are grouped together under the heading of the goods market. In economics, this grouping together is called aggregation.
It is in the goods market that households (consumers) buy their goods and services and the producers supply their goods and services. Two active participants in this market are households, as the demanders of goods and services, and firms, as the suppliers of goods and services.