Demand & Supply
...case, the quest is for maximum profits. Business profits are the difference between sales receipts and total cost. Business firms try to use resources efficiently in producing products that consumers desire, to maximize profits. The easiest way to keep track of all this market activity is to distinguish between the two basic markets. The first of the two markets is the factor market. The factor market is any place where factors of production, such as land, labor, capital, are brought and sold. For example, you’re making a factor of production your labor available to producers. The producers will hire you; purchase your services in the factor market, if you are offering the skills they need at a price they are willing to pay. The same kind of exchanges occurs in factor markets when the government enlists workers into the armed services or when the Japanese buy farmland in Montana. But interactions within factor market are only half the story. For instance consumers go to the grocery store to buy desired goods and services. Meaning consumers buying products, again interaction with business firms, this time purchasing goods and services those firms have produced. These interactions occur in product markets. A product market is any place where finished goods and services are bought and sold. Also, foreigners participate in the market. Below in figure 3.1 is a visual of how the factor markets and products market work together in a model called The Circular Flow. The circular flow model is a simple way to visually show the economic transactions that occur between households and the firms in economy. In figure 3.1 the arrow connecting product markets to consumers emphasizes the facts that consumers, by definition, don’t supply products. When individuals produce goods and services, they do within the government or business sector. For instance, a doctor, a dentist, or an economic consultant functions in two sectors. When selling services in the market, this person is regarded as a “business”; when away from the office, he or she is...