The market approach to valuation is primarily based on which economic principle?

The market approach to valuation is primarily based on the principle of substitution. This principle asserts that a rational buyer will not pay more for a property than what it would cost to acquire a comparable substitute in the market. Essentially, if a property is priced significantly higher than similar properties with comparable features, buyers will gravitate toward those alternatives.

In application, when valuing real estate, appraisers look for recent sales of similar properties, adjusting for differences to establish a value that reflects the current market conditions. This reliance on substitution aligns with the idea that market prices reflect what buyers are willing to pay based on comparable sales, thereby reinforcing one of the key economic theories at play in market-based valuations.

In contrast, the other options, while relevant to various aspects of economic principles, do not serve as the foundational basis of the market approach to valuation. Cost of production relates to the cost method of valuation, while supply and demand and market saturation pertain to broader market dynamics and can influence property values but do not specifically define the market approach's reliance on the principle of substitution.