Factor markets are where the inputs used to produce goods and services are bought and sold. These inputs, known as factors of production, include labor, land, capital, and entrepreneurship. Unlike product markets, where finished goods are exchanged, factor markets deal with the resources essential for production.

Understanding factor markets is crucial for analyzing how businesses allocate resources, how income is distributed in an economy, and how market forces influence wages, rents, and profits. These concepts are especially relevant in industries that depend heavily on specific factors, such as agriculture, construction, and manufacturing.