Which statement about demand, supply and value is consistent with appraisal theory?
Correct Answer
D) Demand and supply interact to set value, like scissors
Neither demand nor supply alone determines value. Alfred Marshall’s scissors analogy illustrates that both interact in a competitive market. Cost of production affects supply but does not by itself set value.
Why This Is the Correct Answer
Option D is correct because demand and supply interact to determine value in a competitive market. Marshall's scissors analogy illustrates that both blades cut the cloth. Neither side alone determines value.
Why the Other Options Are Wrong
Option A: Demand alone determines value; supply is irrelevant to it
Option A, demand alone determines value and supply is irrelevant, ignores half of the relationship. Supply affects value too, so this one-sided view is incorrect.
Option B: Supply determines value; demand affects price but not value
Option B, supply determines value while demand affects only price, ignores demand's role in value. Both demand and supply interact to set value.
Option C: Value is set by the cost to build, apart from demand
Option C, value set by the cost to build apart from demand, overlooks demand. Cost of production affects supply but does not by itself set value.
Two blades cut
Like scissors, demand and supply are two blades, and both are needed to cut a price.
How to use: Use the scissors image to reject any answer that credits only one side of the market.
Exam Tip
Answers that say one factor alone sets value are usually wrong on this topic. Look for the answer that combines demand and supply.
Common Mistakes to Avoid
- -Believing cost to build sets market value
- -Ignoring supply when analyzing value
- -Treating demand as affecting price but not value
Concept Deep Dive
Analysis
This question tests the basic economic relationship between demand, supply and value. Neither demand nor supply alone sets value; they interact. Alfred Marshall compared them to the two blades of a pair of scissors, both of which cut the cloth.
Background Knowledge
Value in a competitive market results from the interplay of demand and supply. Demand reflects desire backed by purchasing power, while supply reflects the quantity available at given prices. Cost influences supply, but buyers' willingness to pay must also be present.
Real-World Application
A builder constructs costly homes in an area with little buyer demand, and they sell below cost. Elsewhere, scarce homes in a high-demand area sell well above cost. The appraiser explains both outcomes by the interaction of demand and supply.
More Market Questions
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Under USPAP Standards Rule 1-3(a), which item must an appraiser identify and analyze when necessary for credible results in a market value assignment?
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