Factor markets are markets for the inputs used in production such as labor, capital, and land. In the labor market, firms seek to hire employees, and workers seek employment.

The demand for labor refers to the number of employees a firm aims to hire during a specified time period at a given wage rate. For instance, on an organic farm, the owner must decide how many workers are needed each week to manage the crops and harvest the produce.

Demand for labor is a derived demand. Derived demand implies that the requirement for labor is contingent upon the demand for the goods and services that labor helps to produce.

For example, as people become more health-conscious, they might prefer organic food products because they are perceived to be healthier and free from synthetic pesticides and fertilizers. This may lead to a higher demand for organic food products such as organic fruits and vegetables. Farm owners may then hire more labor to increase the production of organic fruits and vegetables.

Firms base their hiring decisions on the anticipated consumer demand for their products. This relationship illustrates the indirect yet pivotal role that consumer preferences play in determining labor market dynamics.