Market Price, Factor Cost & Basic Price

Factor cost, basic prices, and market prices are amongst some of the most essential curricula for students who have selected Commerce stream as their 10+2.To understand these in a better way, it is essential to get to know the basis of the terms. 

Factor Cost 

The total cost incurred in deploying all factors, which led to the production or generation of goods and commodities available in the market, is known as factor cost. 

Basic Price 

It is the value or amount which a producer expects to receive from the consumer by selling one unit of product. This amount receivable is exclusive of all taxes and inclusive of subsidy. Therefore, formula for Basic price can be written as

Basic price = factor cost + Production taxes – Production subsidy 

Where production tax and production subsidy are determined in reference to production and don’t necessarily depend upon the volume of actual production. Therefore, stamp duty, registration fee, land revenues, etc. are a few examples of production tax. And these production subsidies are given to farmers, small industries, administrative subsidies to cooperatives, etc. 

This is how one can calculate the basic Price of a commodity receivable by the producer of the good.  

Market price 

As the name suggests, market price is a measure of the amount at which goods or commodities are made available to the general consumer for sale. This total cost is inclusive of the entire production cost right from the purchase of raw material to worker wages, input prices, rent, interest, profit, etc.

Unlike basic Price, it is inclusive of the imposed taxes on the goods to be sold in the market. It also deducts the subsidies offered by the government if there is any. 

Subsequently, one can calculate market price of a commodity with this formula mentioned below – 

Market Price = P + T – S 

Where, 

P = Basic price

T = Production taxes 

S = Production subsidy

Where production tax and production subsidy are determined in reference to production and don’t necessarily depend upon the volume of actual production.

What is GDP at Factor Cost?

To understand this concept of GDP at factor cost, you first need to understand a few pointers as mentioned below. 

  • GDP and GVA are the tools which are used for measuring economic growth of a nation. 

  • GDP stands for Gross Domestic Product and is the measure of the value of the end-products produced in a country. 

  • GVA stands for Gross Value Added, and it quantifies the value of the total production of goods and commodities in a nation. 

Therefore, GDP at Factor cost is the total value of goods and commodities produced in a year in a country by its all production units. This value calculated here is inclusive of depreciation as well. 

GDP at Factor Cost = Sum of all GVA at factor cost. 

GDP at Market Price = GDP at factor cost + Product taxes + Production tax – Product subsidies – Production subsidies. 

Test your Knowledge -

Q1. GDP is Measure of 

  1. A country’s income 

  2. Consumer spending 

  3. A country’s wealth 

  4. Net trade income 

Q2. Adjusting GDP from Market Prices to Factor cost Requires

  1. Addition of indirect taxes 

  2. Subtraction of subsidies 

  3. Deduction of indirect taxes and subsidies 

  4. Deduction of indirect taxes and addition of subsidies 

Q3. A Higher GDP Per Capita Does not Mean that Quality of life has Improved in the Area, and the Reasons are 

  1. It does not measure quality of items produced in the country 

  2. It is only measured every 5 years 

  3. It measures wealth and not income 

  4. It measures gross domestic product 

Q4. The Value of Domestic Output Attained by Residents of Country before Depreciation and Addition of Influence of Taxes and Subsidy is known as 

  1. GDP at factor cost 

  2. GNP at factor cost 

  3. GNP at market prices

  4. GDP at market prices 

  5. NNP at factor cost 

With this concept of such costs and prices in place, students will be able to learn nuances of this subject better. They can further acquire help and in-depth knowledge of the topic by going through Vedantu’s website. We offer detailed learning exposure to students willing to reach the extra mile in their academics. 

FAQ (Frequently Asked Questions)

1. What is the Market Price?

The market price is a price at which goods and commodities are sold to end consumers. This Price is decided by keeping cost of production, storage, packaging, transport, interest, and profit in mind. Hence, final cost decided is also inclusive of various taxes applicable on the product and the subsidies offered by the government to purchase a product is also taken into account. 

Market Price = Basic price + Production taxes – Production subsidy

2. What is the Difference between Factor Cost and Market Price?

Factor cost is the total amount which the manufacturer had to invest in production of a good or commodity. It doesn’t include any taxes imposed on the final product. But, the market price is the final cost at which the manufacturer sells the goods to customers. And these are inclusive of all the applicable taxes. Further, the final Price is decided by also keeping the subsidies offered by the government into account.

3. What is GDP at Factor Cost? 

GDP at factor cost is the total value of goods and commodities produced in a year in a country by its all production units. The value calculated here is inclusive of the depreciation as well. 

In a nutshell, GDP at Factor cost = Sum of all GVA at factor cost. 

Where GVA stands for Gross Value Added and it quantifies the value of the total production of goods and commodities in a nation.

4. How to Calculate GDP at Market Price and Factor Cost?

GDP at market prices = GVA at basic prices + Product taxes – Product subsidies.  

Where,

GVA at basic Price = GVA at factor cost+ Production taxes - Production subsidies. 

Also, 

GDP at factor cost = Sum of all GVA at factor cost.