Economy / Economic Growth and its Measures / Market Price and Factor Cost
Market Price and Factor Cost
- Market Price:
- Market price refers to the actual price at which a good or service is bought or sold in the market.
- It includes both the cost of production (factor cost) and any indirect taxes imposed by the government.
- Indirect taxes can include Goods and Services Tax (GST), customs duties, excise duties, and other similar charges.
- Factor Cost:
- Factor cost represents the actual production cost incurred by firms and industries.
- It includes expenses related to all the factors of production, which are land, labor, and capital.
- In other words, factor cost accounts for the payments made to the owners of these production factors (rent for land, wages for labor, and returns on capital).
Calculation: Market Price (MP) = Factor Cost (FC) + Indirect Taxes - Subsidies
- If the market price is '100,
- Indirect taxes are '18,
- Subsidies are '8,
Using the formula: Market Price (100) = Factor Cost (FC) + Indirect Taxes (18) - Subsidies (8) Solving for Factor Cost (FC): FC = Market Price - Indirect Taxes + Subsidies = 100 - 18 + 8 = 90 So, the factor cost in this case is '90.
Significance:
Understanding the difference between market price and factor cost is crucial for various economic analyses and policy-making:
- Policy Rationalization:
- It helps in evaluating the impact of government policies, including taxes and subsidies, on the production and pricing of goods and services.
- Competitiveness:
- Examining GDP at factor cost allows for an assessment of how competitive market forces and government interventions (like taxes and subsidies) affect economic activities.
- Resource Allocation:
- It aids in making informed decisions about resource allocation, as factor costs provide a more accurate representation of the actual production expenses incurred by firms.
Overall, distinguishing between market price and factor cost provides valuable insights into the efficiency and competitiveness of an economy, guiding policymakers in formulating effective strategies for economic growth and development.
