Which of the following best describes the difference between the factor market and the product market?

• A. The factor market deals only with consumer goods, while the product market deals only with raw materials.
• B. The factor market is where resources such as labor and capital are bought and sold, while the product market is where finished goods and services are bought and sold.
• C. The factor market and the product market are both markets for finished goods and services.
• D. The factor market is where firms sell products to households, while the product market is where households sell resources to firms.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the definition of the factor market. The factor market is where factors of production—such as labor, capital, land, and entrepreneurship—are bought and sold. These are the inputs used by firms to produce goods and services.
2. Step 2: Understand the definition of the product market. The product market is where finished goods and services are bought and sold. Households typically buy these goods and services from firms.
3. Step 3: Compare the two markets by identifying what is exchanged in each. In the factor market, resources (inputs) are exchanged, while in the product market, final goods and services (outputs) are exchanged.
4. Step 4: Recognize the roles of households and firms in each market. In the factor market, households supply factors of production to firms, and firms pay for these resources. In the product market, firms supply finished goods and services to households, who pay for them.
5. Step 5: Use this understanding to evaluate the given options and identify the statement that correctly describes the difference between the factor market and the product market.