July 24, 2024 

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Markets that exchange the services of the four factors of production--labor, capital, land, and entrepreneurship. The buyer of factor services is business sector. The seller of these services is the household sector. The study of macroeconomics is concerned with imbalances in the resource markets, especially surpluses and the resulting unemployment of resources. The resource markets, also termed factor markets, are one of three primary sets of macroeconomic markets. The other two are product markets and financial markets.
Resource markets are important to the macroeconomic analysis of full employment and unemployment. While the product markets usually take center stage in macroeconomics, activity in the resource markets are closely connected. If more output is traded through the product markets, then additional productive resources are hired through the resource markets. Moreover, if activity in the product markets declines, then resources are more likely to be unemployed with a surplus in the resource markets.

Factor Services

The resource markets exchange factor services, the productive services of the four factors of production--labor, capital, land, and entrepreneurship. The payment for these factor services then becomes income for the resource owners.

The resource markets only exchange factor services, not the actual factors. This is probably obvious for labor services. The buying and selling of human workers has not existed (legally) since the abolition of slavery. The resource markets trade only the services of labor.

This also holds for the other factors of production. For example, resource markets only trade the services of capital goods not the capital. Capital goods (newly produced ones) are traded through the product markets.

Buyers and Sellers

The household sector is on the supply side of the resource markets. The business sector is on the demand side.
  • Household Supply: The household sector owns all four factors of production. This sector supplies the services of these factors through the resource markets in exchange for payment. This payment for factor services is also the income of the household sector.

    The critical point is that all resources are owned by someone in the household sector. People obviously own their own labor and entrepreneurial abilities. However, capital and land are also ultimately owned by members of the household sector, often indirectly through the ownership of a business enterprise.

  • Business Demand: The business sector combines the four factors of production to produce the goods and services. To produce output it must acquire the factors of production from the household sector, which it does through the resource markets. It hires factor services based on expectations of selling the resulting output through the product markets. The more production sold, the more factor services demanded.

One of Three

The resource markets are one of three groups of macroeconomic markets. The other two are product and financial.
  • Product Markets: The product markets exchange the production of final goods and services, what is formally termed gross domestic product. The buyers of this production are the four macroeconomic sectors--household, business, government, and foreign. The seller of this production is primarily the business sector. A substantial part of macroeconomics is devoted to explaining how and why gross domestic product exchanged through the product markets rises or falls.
  • Financial Markets: The commodities exchanged through financial markets are legal claims. Legal claims, or financial instruments, represent ownership of physical assets, capital as well as other goods. Because the exchange of legal claims involves the counter flow of income, those seeking to save income buy legal claims and those wanting to borrow income sell legal claims.

The Circular Flow

The Circular Flow
Circular Flow
Resource markets are a key component of the circular flow model of the economy. The circular flow captures the continuous movement of production, income, and factor payments between producers and consumers.

A basic representation of the circular flow is displayed to the right. The four components of this simple model are: household sector, business sector, product markets, and resource markets. The household sector at the far left contains the consuming population of the economy. The business sector at the far right includes all of the producers.

The resource markets at the bottom of the flow direct factor services from the household sector to the business sector in exchange for payment flowing in the opposite direction. The product markets at the top of the flow direct production from the business sector to the household sector in exchange for payment flowing in the opposite direction.

The circular flow indicates that the income used by the household sector to purchase goods through the product markets is obtained by selling factor services through the resource markets. It also indicates that the revenue used by the business sector to pay for factor services obtained through the resource markets is generated by selling goods through the product markets.

Aggregate Equilibrium

It is often convenient to combine the thousands of individual microeconomic resource markets used to exchange a wide assortment of factor services throughout the economy into an abstract aggregation. Demand in this aggregate resource market reflects the hiring of productive resources by businesses in the individual markets. And supply in the aggregate resource market reflects the total amount of resource services seeking productive employment in the individual markets.

Equilibrium in the aggregate resource market is an essential aspect of macroeconomic analysis. In particular, overall macroeconomic equilibrium, especially what is termed long-run equilibrium, requires aggregate resource market equilibrium. This exists if the total quantity of productive resources that businesses seek to employ is equal to the total quantity of productive resources seeking employment.

However, this does not mean that every individual resource market is in equilibrium. One might have a bit of a shortage and another a bit of a surplus. As long as the shortages and surpluses balance out, meaning total quantity demanded is equal to total quantity supplied, then the aggregate resource market is in equilibrium.

Although equilibrium in the aggregate resource market is essential to long-run equilibrium, short-run equilibrium exists even without resource market equilibrium. Short-run equilibrium is a key aspect of business-cycle instability and the macroeconomic problems of unemployment and inflation. In fact, unemployment and inflation occur when the aggregate resource market is not in equilibrium.

Spotlight on Labor

Resource markets exist for all four factors of production. However, the analytical spotlight is often placed on labor resources.
  • One reason for this special attention is that labor constitutes a majority of resources used in production (around 60 percent). Any activity transpiring in resource markets, such as unemployment, is most likely to affect labor.

  • Another reason is that the employment of labor has a direct bearing on individual living standards and the well-being of a large segment of the population. If problems, like unemployment emerge, many members of society (especially voting citizens) are likely to suffer.

Natural Unemployment

Focusing on the labor aspect of resource markets gives rise to the concept of natural unemployment. Natural unemployment exists when labor services are in balance, that is, the number of workers seeking employment is equal to the number of available jobs. There is neither a surplus of labor nor a shortage.

However, lacking a surplus or shortage does not mean unemployment is absolutely zero. Two types of unemployment persist even though labor services are in balance--frictional unemployment and structural unemployment. Frictional unemployment occurs when unemployed workers are qualified for, but unaware of or geographically separated from, available jobs. Structure unemployment occurs when unemployed workers lack the skills needed for available jobs. In both cases, the number of workers equals the number of jobs, they simply do not match up.


Recommended Citation:

RESOURCE MARKETS, AmosWEB Encyclonomic WEB*pedia,, AmosWEB LLC, 2000-2024. [Accessed: July 24, 2024].

Check Out These Related Terms...

     | macroeconomic markets | product markets | financial markets |

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     | macroeconomics | market | demand | supply | factors of production | macroeconomic goals | production | abstraction | microeconomics | equilibrium | ownership and control |

And For Further Study...

     | business cycles | unemployment | inflation | macroeconomic sectors | household sector | business sector | government sector | foreign sector | circular flow | macroeconomic problems | macroeconomic theories | shortage | surplus | inflation | factor market analysis | derived demand | aggregate market analysis |

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