Learn the Basic Commerce Terms
Market Price, Factor Cost, and Basic Price are the basic concepts that are to be learned and understood by the students at their basic level. This content is especially to make the foundation strong. Factor cost, basic prices, and market prices are amongst some of the most essential curricula for students who have selected the Commerce stream as their 10+2. To understand these in a better way, it is essential to get to know the basics of the terms.
Definitions of the Terms – Factor Cost, Basic Price, and Market Price
Factor Cost
The total cost incurred in deploying all factors, that 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, the formula for the 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, the 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 are any.
Subsequently, one can calculate the market price of a commodity with this formula mentioned below –
Market Price = P + T – S
Where,
P = Basic price
T = Product taxes
S = Product subsidy
Where product tax and product 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 that are used for measuring the 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 a Measure of
A country’s income
Consumer spending
A country’s wealth
Net trade income
Q2. Adjusting GDP from Market Prices to Factor cost Requires
Addition of indirect taxes
Subtraction of subsidies
Deduction of indirect taxes and subsidies
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
It does not measure the quality of items produced in the country
It is only measured every 5 years
It measures wealth and not income
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
GDP at factor cost
GNP at factor cost
GNP at market prices
GDP at market prices
NNP at factor cost
With this concept of such costs and prices in place, students will be able to learn the 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.
FAQs on Market Price vs. Factor Cost vs. Basic Price
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 the cost of production, storage, packaging, transport, interest, and profit in mind. Hence, the final cost decided is also inclusive of various taxes applicable on the product, and the subsidies offered by the government to purchase a product are 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 the 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 of Production taxes - Production subsidies.
Also,
GDP at factor cost = Sum of all GVA at factor cost.
