Three primary examples of factor markets are labor, land and capital. These factors are required to produce a good or service and can be broken down into smaller individual factors, such as the various natural resources that are derived from the overall factor market of land. Labor can also be divided into the factor markets of unskilled labor, skilled labor and the entrepreneurial skills needed to staff and launch the firms that will produce a good or service.
The required factors of production are purchased by the producer companies in the factor markets. Almost all of the resources and services required for production can be considered part of the factor market when they are traded for during the production process. The basic unit of trade within the factor market of labor is the wage rate. In addition to production resources such as water, natural gas and minerals, capital is a much-needed production resource for which the unit of trade is the interest rate charged by lenders.
Factor markets are affected by the same dynamics as the markets for the produced goods for which they are required. As the demand curve and price elasticity of the finished product alters its demand and market price, the factor markets required for that product are also affected. The interaction between production markets and their associated factor markets reflects the economic principle of derived demand.