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Subject 1. Types of Markets

A market is any arrangement that enables buyers and sellers to get information and do business with each other. A competitive market is a market that has many buyers and many sellers so that no single buyer or seller can influence prices.

Broadly speaking there are two types of markets:

  • Goods markets are markets where final products from businesses or firms are exchanged. Households and firms are usually buyers and firms are sellers.

  • Factor markets are markets for the factors of production. Factors include labor, capital, raw materials, entrepreneurship, etc. For example, in labor markets, households are sellers and firms are buyers.

The demand for a factor exists because there is a demand for goods that the resource helps to produce. The demand for each factor is thus a derived demand; it is derived from the demand of consumers for products. For example, engineers are needed to design cars. A car manufacturer's demand for engineers thus depends entirely upon the demand for cars. The demand for engineers is a derived demand.

Practice Question 1

The factors market is the market where ______

A. consumers buy products from businesses.
B. businesses buy factors of production from households.
C. households sell inputs to consumers.

Correct Answer: B

Households own resources and make them available for sale to businesses in the resource market. Factors are also referred to as inputs or as resources of production. Products are purchased in the product or output market. Bonds are neither an output nor an input. They are bought and sold in financial markets, also sometimes referred to as capital markets.

Practice Question 2

Which of the following markets is the LEAST ACCURATELY described as a factor market?

A. The market for plumbers and electricians
B. The market for building materials
C. The market for residential houses

Correct Answer: C

Study notes from a previous year's CFA exam:

1. Types of Markets