Adam Smith's Theory of value stated that the value of a commodity depended on________

Step 1: Analyze the question The question asks what Adam Smith's theory of value says determines the value of a commodity. This is a History of Economic Thought question.

Step 2: Explain the concept Adam Smith (The Wealth of Nations, 1776) is associated with the labour theory of value. He distinguished between:

• Value in use: the usefulness of a good (e.g. water is very useful).
• Value in exchange: what a good can be traded for (e.g. diamonds exchange for a lot).

He explained exchange value mainly through labour. In his example of early societies, if it takes twice as much labour to kill a beaver as a deer, one beaver will exchange for two deer. In his view, the real measure of the exchange value of all commodities is the labour needed to produce them, or the labour they can command.

(In more developed economies, Smith also said price is made up of wages, profit and rent. That is the "cost of production" idea, which Option B refers to. But his core value theory is the labour theory.)

Step 3: Check the options

• A. Market price in a free market over a long period: This is closer to his idea of the "natural price", not his theory of value.
• B. Overall cost of production: This is a later refinement, associated with Ricardo, Marshall and others. It is not the headline of Smith's theory.
• C. The amount of labour expended on its production: This matches the labour theory of value. ✔
• D. Relative scarcity: This is more like the marginal utility or scarcity view of the later neoclassical economists.

Step 4: Answer The correct option is C.

Exam tip: Link the names to the theories:

• Smith and Ricardo (and Marx): Labour theory of value
• Marshall: Supply and demand together (the "scissors" blades)
• Jevons, Menger and Walras: Marginal utility

If you see "Adam Smith" and "value", think labour.