Which economic principle serves as the foundation for the three approaches to value?

The principle that serves as the foundation for the three approaches to value is the principle of substitution. This principle posits that a buyer will not pay more for a property than the cost of an equally desirable substitute. This idea underlies all three approaches to valuation—cost, sales comparison, and income approaches—by emphasizing that the value is intrinsically linked to the prices of similar properties and the cost to acquire or reproduce a property.

In the cost approach, for instance, an appraiser determines value by calculating the cost to replace or reproduce the improvements on the property, then adjusting for depreciation. In the sales comparison approach, the appraiser looks at comparable sales and adjusts based on differences in features, reflecting the idea that a buyer would consider the lower-priced alternatives. Lastly, in the income approach, the principle of substitution is used to determine the value based on the income the property generates in comparison to other potential investment opportunities.

The other options—principle of demand, principle of contribution, and principle of change—do not serve as the foundational basis for the valuation approaches. Demand informs market dynamics, contribution relates to the impact of improvements on property value, and change addresses how value can fluctuate over time, but none encapsulate the core concept that defines the