Many households want to buy homes in a town, but few can obtain financing or afford the prices. Which factor of value limits demand here?
Correct Answer
D) Effective purchasing power, since desire must be backed by ability
Desire alone does not create economic value; it must be supported by effective purchasing power, meaning buyers are ready, willing and able to buy at some price. The homes still have utility, and nothing in the facts suggests excess supply or a title problem.
Why This Is the Correct Answer
Option D is correct because desire alone does not create economic value; it must be supported by effective purchasing power. People must be ready, willing and able to buy at some price. In this town households are willing but not able, so effective purchasing power is the missing element.
Why the Other Options Are Wrong
Option A: Utility, because the homes do not satisfy the buyers’ desires
Option A says utility is the limit because the homes do not satisfy buyers' desires, but the facts say many households want these homes. The homes still have utility; what is missing is the ability to pay.
Option B: Scarcity, because too many homes are available for sale
Option B says scarcity is the limit because too many homes are for sale, but nothing in the facts suggests excess supply. The problem described is buyers' inability to finance or afford homes, not an oversupply.
Option C: Transferability, because title to the homes cannot be conveyed
Option C says transferability is the limit because title cannot be conveyed, but the facts mention no title problem. The homes can be sold; buyers simply cannot afford them or obtain loans.
Willing is not able
Demand that counts requires buyers who are ready, willing, and able; wanting a home without the means to buy it does not create value.
How to use: Use this when a question describes buyers who want property but cannot pay or borrow.
Exam Tip
If the facts say buyers want the property but cannot afford or finance it, the limiting factor is effective purchasing power.
Common Mistakes to Avoid
- -Equating strong buyer interest with effective demand
- -Blaming scarcity or oversupply when the problem is ability to pay
- -Overlooking financing availability as part of purchasing power
Concept Deep Dive
Analysis
This question tests the difference between desire and effective demand. Many households want homes, so desire exists, but few can obtain financing or afford prices. Desire creates economic value only when it is backed by effective purchasing power, so that is the factor limiting demand here.
Background Knowledge
Effective purchasing power is the ability of buyers to pay, through income, savings and access to credit. It is what turns desire into demand that affects prices. Changes in lending standards, interest rates or incomes can expand or shrink effective demand even when desire for housing is unchanged.
Real-World Application
After lenders tighten credit standards, an appraiser observes that showings remain high but closed sales drop sharply in a moderately priced area. The appraiser explains that interest remains strong but fewer buyers can qualify, reducing effective demand.
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