What Is a Factor Market?
A factor market is the part of the economy where the factors of production are bought and sold. Factors of production are the resources a business uses to make goods and services. The traditional categories are labor (human work), land (natural resources and physical space), and capital (machinery, buildings, and tools). Many economists also count entrepreneurship as a fourth factor, meaning the organizing and risk-taking effort that brings the others together. Unlike a product market, where finished goods and services are traded, a factor market trades the inputs used to create them.
How It Works
In a factor market, households and firms play opposite roles. Households own the factors and supply them, for example by working for pay or renting out property. Firms demand factors because they need them to produce output. The price of each factor is determined by supply and demand, just like the price of any other good. The price of labor is the wage, the price of land is rent, and the price paid for borrowed money used to acquire capital is an interest rate.
Firms tend to keep hiring or using more of a factor as long as the value each additional unit adds to output is greater than its cost. This reasoning is known as marginal productivity theory, and it helps explain why factor prices move in response to changes in demand and supply.
Why It Matters to Investors
Factor markets influence company costs and profit margins. When wages, rents, or borrowing costs rise, businesses that depend heavily on those inputs may see their earnings come under pressure, while lower input costs can have the opposite effect. Investors often consider these conditions when studying an industry, since they shape how profitable companies in that industry may be over time.
It is easy to confuse this concept with factor investing, which is an investment approach that selects stocks based on characteristics such as value, size, or momentum. The two terms are unrelated in meaning. A factor market is an economic concept, while factor investing is a strategy used to build portfolios.
Updated November 4, 2026. For general education only; not financial, tax or legal advice.