factor market
We usually picture a market as a place where finished things are bought and sold: bread, phones, haircuts. But before any of those can exist, businesses must buy the ingredients that make them — the hours of workers, the use of machines and buildings, the land, the raw materials. A factor market is the marketplace for these ingredients of production, called the factors of production. It is the back room of the economy, where firms shop for the inputs they need.
Economists usually group the factors into four families: labour (human effort and skill), capital (machines, tools, buildings — the made things used to make other things), land (natural resources and physical space), and entrepreneurship (the willingness to organise the other three and bear the risk of a venture). Each factor has its own price, which is also somebody's income: the price of labour is the wage, the price of capital is interest or rental, the price of land is rent, and the reward to entrepreneurship is profit. So a factor market is doing two jobs at once — it decides how inputs get allocated, and it decides who gets paid how much.
The crucial twist is that the roles flip. In an ordinary product market, households buy and firms sell. In a factor market, households sell (they own the labour, the savings, the land) and firms buy. That mirror image is why studying factor markets is the natural way to understand where income comes from: your paycheck is just the price at which you sold your labour in a factor market. The same supply-and-demand logic applies, but with this ownership reversed.
A bakery buys flour and butter in product markets, but it also hires bakers, rents an oven, and leases its shopfront — those last three are factor markets. The wages, the oven rental, and the lease are the bakery's costs, and at the same time they are the income of the baker, the equipment owner, and the landlord.
One bakery touches both product markets (for ingredients) and factor markets (for workers, equipment, premises).
Don't confuse the four factors with money. Money is not a factor of production — it is a claim used to buy factors. The real inputs are people's effort, machines, land, and organisation.