Difference between Market Price and Factor Cost

Market price and factor cost are two important concepts in economics that help in understanding the value of goods and services in an economy. While both terms are related to the price of a product, they differ in their meaning and the factors they consider.

Market Price
Market price refers to the actual price at which a product or service is bought and sold in the market. It represents the price that consumers are willing to pay for a product and the price at which producers are willing to sell it. Market price is determined by the forces of demand and supply in the market and can vary based on various factors such as competition, consumer preferences, and production costs.

Factor Cost
Factor cost, on the other hand, refers to the cost of production incurred by the producer in the form of payments to the factors of production. The factors of production include land, labor, capital, and entrepreneurship. Factor cost takes into account all the expenses involved in producing a product or service, such as wages, rent, interest, and profit. It represents the cost incurred by the producer before any taxes, subsidies, or other external factors are considered.

Key Differences
- Definition: Market price refers to the price at which a product is bought and sold in the market, whereas factor cost refers to the cost of production incurred by the producer.
- Determination: Market price is determined by the forces of demand and supply in the market, while factor cost is influenced by the prices of the factors of production.
- Components: Market price considers the market demand, competition, and consumer preferences, while factor cost includes wages, rent, interest, and profit.
- External Factors: Market price can be influenced by external factors such as taxes, subsidies, and government regulations, while factor cost does not consider these external factors.
- Profit: Market price includes the profit margin for the producer, whereas factor cost does not include any profit component.

Conclusion
In summary, market price and factor cost are two distinct concepts in economics. Market price represents the price at which a product or service is bought and sold in the market, while factor cost refers to the cost of production incurred by the producer. Understanding these concepts is crucial for analyzing the dynamics of the market and evaluating the profitability of production processes.

Market price =factor cost +NIT(indirect tax - subsidies)