Market Price vs Factor Cost vs Basic Price - Key Differences

Market price, factor cost, and basic price are some of the most commonly used terms in economics. They come into use while measuring the value of goods and services in national accounts or economic statistics. Each of these methods represent the different ways in which the prices can be measured in the economy. 

 

What is the meaning of Market Price?

The market price is the actual price at which the goods and services are actually bought and sold in the market. The prices include indirect taxes like VAT and sales tax. This excludes subsidies that the government may give on the product. For example, if the products sold in a market for INR 100 but there is 10% sales tax, the market price would be INR 110 which includes the tax. 

Example: If you go to the store and purchase soft drink for INR 40, that INR 40 is the market price 

There are several factors and features that influence the market price which are listed below:

• Demand & Supply: The low or high in demand and supply affects the prices. Higher demand or lower supply increases the prices. 
• External Factors: The external factors like economic changes, taxes, and government regulations influence the market prices 
• Competition: This effects the market pricing set by the companies due to the presence of alternative products 

 

What is the meaning of Factor Cost?

The factor cost is the cost that excludes all the taxes and subsidies. It is the price that is incurred in the production of goods or services like labor, capital, land, etc. The factor cost is often used to analyze the economic perspective and the national accounts for understanding the costs that incurred while producing the product. For example when a manufacturer spends INR 30,000 on labor, raw materials, and capital to produce a washing machine, the factor cost of the washing machine is INR 30,000, excluding the indirect taxes.

There are governing features in the factor cost estimation: 

• No indirect taxes: The factor cost does not include taxes like the sales tax, VAT, subsidies
• Production costs: Shows the direct costs incurred by the production for factors like labor, capital, and raw materials.
• National accounts: The factor cost is an important part in the calculation of GDP using the income approach and evaluates the production efficiency. 

 

What is the meaning of Basic Price?

Basic price is the price of any goods or service that excludes taxes but includes subsidies that may have been provided by the government. It is the price received by the producer for the product or service at the time of production before any taxes or subsidies are added. For example, when the government provides a subsidy of INR 5000 for each washing machine sold, and the production price is INR 10,000, the basic price of the washing machine would be INR 15,000 (INR 10,000 + 5,000 subsidy) 

The key features of the basic price includes: 

• Includes the subsidy but not taxes: The basic price includes the subsidies provided to producers. The taxes on the goods and services are excluded. 

• Producer revenue: The price received by the producer for the goods or services in the market before the imposition of any taxes or subsidies 

• Provides economic analysis: The basic price offers an economic analysis whicb is used for national accounting. It helps in the calculation of GDP using the production method. 

 

Key Differences between Market Price, Factor Cost, and Basic Price

The accurate data analysis is performed from understanding the difference between market price, factor cost, and basic price. All these prices offer a different perspective on the production, sale, and taxation of goods and services. 

• Market price defines the actual transaction price, and includes all the associated costs like taxes
• Factor cost is essential for evaluating the actual transaction price, excludes the indirect taxes 
• Basic price offers a peek into the price producers receive after including the subsidies 

 

The key differences between Market Price, Factor Cost, and Basic Price are tabulated below:

 

Market Price	Factor cost	Basic price
Includes the taxes like sales tax or VAT	Excludes the tax	Excludes the tax but includes subsidies
No subsidies included	No subsidies included	Excludes the subsidies
Focuses on the price at which goods are bought or sold	Costs of factors of production	The price that is received by the producers
It is used for real-world transactions	It is used for national accounts, GDP, income approach	It used for national accounts, GDP, production approach
The price paid by a customer at the time of checkout	The cost of raw materials, labor, capital	The price received by producers after government subsidies

 

Formulas for Market Price, Factor Cost, and Basic Price

The formulas used for the calculation of Market Price, Factor Cost, and Basic Price help us understand how the taxes, subsidies, and production costs influence the final price of the goods in the market. 

Market Price 

The market price is calculated by adding the indirect taxes to the factor cost and then subtracting the subsidies provided by the government. The result we get is the actual price paidby the consumer at the time of check out. 

 

Market price = Factor Cost + Indirect Taxes - Subsidies

 

Factor Cost 

The factor cost is determined by subtracting the indirect taxes and adding any subsidies to the basic price. It is the cost of production. 

 

Factor Cost = Basic Price - Indirect taxes + Subsidies

 

Basic Price 

The basic price is the amount received by the producer for goods or services which excludes the services but includes the subsidies. To determine the basic price, subtract the indirect taxes from the market price and add the subsidies. 

 

Basic Price = Market Price - Indirect Taxes + Subsidies

 

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Frequently Asked Questions (FAQs)

What is the main difference between market price and factor cost?

The market price is the actual price at which the goods and services are actually bought and sold in the market. Whereas the factor cost is the cost that excludes all the taxes and subsidies. 

How is basic price significant for economic analysis?

The basic price shows the price of any goods or service that excludes taxes but includes subsidies that may have been provided by the government. It offers an economic analysis which is used for national accounting and helps in the calculation of GDP using the production method. 

In what way do Market Price, Factor Cost, and Basic Price affect the GDP calculations?

The factor cost is used to measure the income approach, the basic price is used in the production method, and the market price is used in the expenditure method while calculating the GDP.