ECONOMICS
+25 XP earned 🎉
Unit 1 · National Income
🧮

Market Price and Factor Cost

Medium 18 minExam importance ★★★★★ Sandeep Garg — Macroeconomics, Ch 2
Unit Quiz

1 Quick Explanation 1–3 min

Market price is what the consumer pays; factor cost is what factors actually earn.

The difference is indirect taxes minus subsidies.

2 Detailed Notes

Definition

Definitions

  • Market Price (MP) = price paid by the final buyer = factor cost + indirect taxes − subsidies.
  • Factor Cost (FC) = what factors of production actually receive = MP − indirect taxes + subsidies.
  • Net Indirect Taxes (NIT) = indirect taxes − subsidies.

Formula

The bridge formula

GDPfc = GDPmp − NIT NIT = Indirect taxes − Subsidies

When you pay GST of ₹18 on a ₹100 good, you pay ₹118 at MP, but producers keep roughly ₹100 at FC.

Important

Which aggregate is 'National Income'?

National Income (as defined) is NNP at FACTOR COST. If the question says GDPmp, first convert to FC before treating it as income of residents.

Example

Full conversion example

GDPmp = 1,00,000; Dep = 10,000; NFIA = 5,000; NIT = 15,000. GDPfc = 1,00,000 − 15,000 = 85,000. NNPfc = 85,000 − 10,000 + 5,000 = 80,000. Answer: ₹80,000.

Key idea

Remember

  • Direct taxes (income tax, corporation tax) are NOT part of NIT — they are paid out of income.
  • Only indirect taxes (GST, excise, customs) and subsidies bridge MP and FC.
  • Subsidies are added back to FC because they lower the market price the consumer pays.

In One Minute

GDPfc = GDPmp − Indirect taxes + Subsidies = GDPmp − NIT. National Income is NNPfc.

Important for Exam

  • ⭐ Formula-based 3-mark numericals every year.
  • ⭐ Direct vs indirect tax in NIT — common misconception.
  • ⭐ 'Market price to factor cost' conversions.
  • ⭐ National Income = NNPfc — the definition line.

Watch & Learn

Class 12 Macroeconomics Chapter 2 - Net Indirect Tax, Factor Cost and Market Price 2022-23 Watch on YouTube

Class 12 Macroeconomics Chapter 2 - Net Indirect Tax, Factor Cost and Market Price 2022-23

by Magnet Brains

Why watch? Crisp conversion formulas and traps.

Open on YouTube
Class 12 Macroeconomics Chapter 2 - Net Indirect Tax, Factor Cost and Market Price 2022-23 Watch on YouTube

Class 12 Macroeconomics Chapter 2 - Net Indirect Tax, Factor Cost and Market Price 2022-23

by Magnet Brains

Why watch? Practice-heavy approach for board numericals.

Open on YouTube

When a verified best video is available it plays right here; the button always opens the same video on YouTube. Topics without a verified pick fall back to a live YouTube search from trusted CBSE channels.

Your Personal Note

Notes are saved on this device and appear on your Bookmarks page.