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Factor Cost, Basic Prices and Market Prices

Factor cost: Total cost of all factors of production consumed or used in producing a good or service.

Basic Prices: The basic price is the amount receivable by the producer from the purchaser for a unit of a good or service produced as output minus any tax payable, plus any subsidy receivable, on that unit as a consequence of its production or sale.

Market price: Market price is the price at which a product is sold in the market. It includes the cost of production in the form of wages, rent, interest, input prices, profit etc. It also includes the taxes imposed by the government and the subsidies provided by the government for the producers would also be reflected in the price.

GVA  at factor cost + (Production taxes less Production subsidies) = GVA at basic  prices

 GDP  at market prices = GVA at basic prices + Product taxes- Product subsidies

Basic Price  = Factor Cost + Production taxes – Production Subsidy

Market Price  = Basic Price + Product taxes – Product Subsidy 

or  Market Price = Factor Cost + Net Indirect Taxes

where,  Net Indirect Taxes = Indirect taxes – Subsidy

This was all about the concept of Factor Cost, Basic Price and Market Price, which is important for students of Commerce. To learn more, stay tuned to CoolGyan’S.