What economic principle is applied in the market approach to value?

The market approach to value primarily relies on the economic principle of supply and demand. This approach determines the value of a property by comparing it to similar properties that have been sold recently in the same market, taking into account the prices that buyers are willing to pay and sellers are willing to accept under current market conditions.

In the context of this approach, supply and demand play a pivotal role. When the demand for properties in a specific area exceeds the supply, prices tend to rise, indicating higher values. Conversely, if the market has a greater supply of similar properties than there are buyers, this typically drives prices down. Thus, understanding how supply and demand influence property values is crucial in the market approach, making this the correct choice.

The other principles, while relevant in certain contexts, do not directly underpin the market approach. Contribution refers to how much a specific feature or improvement adds to the overall value of a property. Location is a critical factor in real estate, but it is more about considering the desirability of a specific area rather than a principle of valuation method itself. Value-in-use focuses on the value of a property based on its current utility to the owner rather than comparing it to sales data of similar properties. Therefore, the market approach is fundamentally grounded