What is the Difference Between Factor Cost and Market Price?

The difference between factor cost and market price lies in the costs involved in the production of goods and services and the final price that consumers pay for those goods and services.

Factor Cost refers to the total cost of all the factors of production consumed or used in producing a good or service. It includes the costs of capital, land, labor, and enterprise, but does not account for subsidies received and taxes paid. In other words, it is the raw cost of production or the costs directly related to the production of goods and services.

Market Price, on the other hand, 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., as well as government-imposed taxes and producer subsidies. In summary, the market price is the price that consumers pay for the final goods and services they purchase, which is made up of factor cost, indirect taxes, and subsidies.

The relationship between factor cost, basic prices, and market prices can be expressed as follows:

Basic Prices = Factor Cost + Taxes on Products – Subsidies
Market Prices = Basic Prices + Distribution Costs
Market Price = Factor Cost + Net Indirect Taxes (Indirect Taxes – Subsidy)

In conclusion, factor cost represents the costs directly involved in the production process, while market price represents the final price that consumers pay for goods and services, incorporating factor cost, taxes, and subsidies.