Which well-known economic principle states that a property's value is determined by what it would cost to purchase a similar property?

The principle of substitution indicates that a property's value is influenced by the cost of acquiring a comparable property. This means that if two similar properties are available, the value of one property will be affected by the price of the other. If a buyer can purchase a similar property for less, the higher-priced property may need to be reduced in value to remain attractive in the market.

This principle is grounded in the idea that consumers will not pay more for a property than what they would spend on a similar one with equal utility, assuming all else is equal. As such, the principle of substitution plays a critical role in valuation and appraisal processes, ensuring that property prices reflect competitive market conditions.

Considering the other options, supply and demand refers to the relationship between the availability of properties and the desire for them, while highest and best use concerns the most profitable use of a property. Opportunity cost involves evaluating the potential benefits lost when choosing one option over another, which is distinct from the valuation focus of substitution. Thus, the principle of substitution is the most fitting to the question posed.