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 basic price, factor cost, and market price?
Basic price, factor cost, and market price are key concepts in economics that relate to how the value of goods and services is calculated. Factor cost is the amount paid to factors of production like labor, land, and capital. The basic price reflects the price received by producers for goods/services, excluding taxes but including subsidies. Market price is the actual price paid by consumers, which includes all taxes and excludes subsidies. Each of these measures serves different purposes for analyzing economic output and taxation effects. Understanding the distinctions helps in grasping how prices move from producers to the end market.
2. What is the formula for calculating basic price?
The formula for basic price helps determine the value received by producers before taxes are imposed. It is calculated by adjusting the market price by removing indirect taxes like sales tax, and adding any product subsidies. The formula is:
Basic Price = Market Price − Taxes on Products + Subsidies on Products
This formula ensures that only the net amount received by producers for their output is considered. By understanding the basic price, economists can better analyze producer incomes and government intervention effects.
3. How does factor cost differ from market price?
Factor cost and market price are different ways of measuring the value of goods and services. Factor cost is the price paid for all inputs used in production, without accounting for taxes or subsidies. In contrast, market price is what consumers actually pay, which includes indirect taxes and excludes subsidies. Key differences include:
- Factor cost is used to measure production costs, while market price measures consumption cost.
- Taxes and subsidies are included in market price but not in factor cost.
4. What is the meaning of basic cost price?
Basic cost price, often simply called basic price, is the amount that producers receive from buyers for goods or services, not including any taxes on the product. However, if there are subsidies linked to the product, these are included. It essentially reflects the net price the seller gets for their output. By focusing on basic price, economists can separate the effects of taxes and subsidies from the value created by production itself.
5. Why are taxes and subsidies important when calculating market price and factor cost?
Taxes and subsidies play a crucial role in distinguishing market price from factor cost. Taxes on products increase the price paid by consumers, making the market price higher than the basic price or factor cost. Likewise, subsidies lower the effective price received by producers or paid by consumers. Understanding their impact is key:
- Taxes are added to the producer’s price, raising the cost to buyers.
- Subsidies are subtracted, decreasing the net price for buyers or raising producer income.
By adjusting for taxes and subsidies, economists obtain more accurate measures of economic output and the real cost or benefit to producers and consumers.
6. How is factor cost calculated from the market price?
Factor cost can be calculated by adjusting the market price to remove the effects of net indirect taxes (taxes minus subsidies). The calculation steps are:
- Start with the market price of goods or services.
- Subtract all indirect taxes (like excise, sales, and service tax).
- Add back any subsidies provided on the products.
The result reflects the amount paid to the factors of production only. Calculating factor cost helps isolate the actual earnings of land, labor, capital, and entrepreneurship involved in creating the product.
7. What role does basic price play in national income accounting?
In national income accounting, basic price is used to value the output of goods and services without the influence of tax policy. It shows what producers earn for their output, excluding product taxes but including product subsidies. As such, it provides a clear measure of actual production contributions without distortion from taxes. By using basic price in calculations, governments and economists can better compare real economic growth across time and policy changes.
8. Can you explain the relationship between market price, basic price, and factor cost?
The relationship between market price, basic price, and factor cost is based on the gradual adjustment for taxes and subsidies. Market price is the final price paid by consumers, which includes product taxes and excludes subsidies. Basic price is derived by removing taxes and adding subsidies from the market price. Factor cost is obtained by further excluding any other production taxes, making it the pure cost of production. This stepwise breakdown helps clarify how government policies affect the price flow from producers to end consumers.
