Question

Suppose Megan earns $600 per week working as an analyst for A-Plus Accountants. She uses $8 to order a mojito cocktail at Little Havana. Little Havana pays Larry $350 per week to wait tables. Larry uses $225 to purchase tax services from A-Plus Accountants. Identify whether each of the following events in this scenario occurs in the factor market or the product market. Event Factor Market Product Market Larry spends $225 to purchase tax services from A-Plus Accountants. Larry earns $350 per week working for Little Havana. Megan spends $8 to order a mojito cocktail.

Which of these transactions take place in the product market?

Answer 1

The Factor Market refers to the market where the trade of the factors of production occurs. This means that this market includes the sale and purchase of capital, land and labor.

The Product market on the other hand is where final goods and services are bought and sold.

a. Larry spends $225 to purchase tax services from A-Plus Accountants - Product Market

This is a product market transaction as the services provided are a final service that need nor go through further processing and are sold directly to the customer.

b. Larry earns $350 per week working for Little Havana. - Factor Market

Larry being paid for work Larry did is a factor market transaction because he sold his labor and was compensated for it by Little Havana.

c. Megan spends $8 to order a mojito cocktail. - Product Market

The cocktail is a final product that is consumed by the customer so this is a product market transaction.