Difference Between Factor Cost and Market Price

Factor Cost vs Market Price
 

There are a number of costs involved in the production of goods and provision of services. Many of these costs are related to the inputs into the production process, the taxes charged by the government, and other costs involved in operating in a dynamic business environment. All costs of production, marketing, advertising, etc. that are involved in the production of goods and services need to be added onto the final price of the product so that a profit can be made. The article takes a look at 2 concepts; factor cost and market price that help understand how producers arrive at a selling price, and explains the similarities and differences between the factor cost and market price.

What is Factor Cost?

There are a number of inputs that are included into a production process when producing goods and services. These inputs are commonly known as factors of production and include things such as land, labour, capital and entrepreneurship. Producers of goods and services incur a cost for using these factors of production. These costs are ultimately added onto the price of the product. The factor cost refers to the cost of factors of production that is incurred by a firm when producing goods and services. Examples of such production costs include the cost of renting machines, purchasing machinery and land, paying salaries and wages, cost of obtaining capital, and the profit margins that are added by the entrepreneur. The factor cost does not include the taxes that are paid to the government since taxes are not directly involved in the production process and, therefore, are not part of the direct production cost. However, subsidies received are included in the factor cost as subsidies are direct inputs into the production.

What is Market Price?

Once goods and services are produced they are sold in a market place at a set market price. The market price is the price that consumers will pay for the product when they purchase it from the sellers. Taxes charged by the government will be added onto the factor price while subsidies provided will be reduced from the factor price to arrive at the market price. Taxes are added on because taxes are costs that increase the price, and subsidies are reduced because subsidies are already included in the factor cost, and cannot be double counted when market price is calculated. The market price will be decided, depending on the cost of production, demand for the product, and prices that are charged by competitors. In economics, the market price is identified as the price at which demand for the product or service is equal to its supply. Changes in the levels of demand and supply, cost of factor inputs and other economic and environmental conditions can affect the market price of a good or service.

Factor Cost vs Market Price

Factor cost and market price are concepts closely related to one another. Factor cost 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 made partially of the factor cost, but other costs such as taxes are added in to determine the final price that must be charged from a consumer.

Summary

• The factor cost refers to the cost of factors of production that is directly incurred by a firm when producing goods and services.

• The market price is the price that consumers will pay for the product when they purchase it from the sellers, and it is made partially of the factor cost.

• Taxes charged by the government will be added onto the factor price while subsidies provided will be reduced from the factor price to arrive at the market price.