What does elasticity of demand measure?

Elasticity of demand specifically measures how sensitive the quantity demanded of a good or service is to changes in its price. When we talk about the responsiveness of demand, we’re referring to how much more or less of a product consumers are willing to buy when the price increases or decreases. This relationship helps businesses and economists understand consumer behavior and can inform pricing strategies.

For instance, if demand is elastic, a small decrease in price could lead to a large increase in quantity demanded. Conversely, if demand is inelastic, price changes have little effect on the quantity demanded. This concept is crucial for businesses when determining how to set their prices and predict how their revenue will be affected by market changes.

The other options pertain to different aspects of economics. For example, the supply side is covered in the first option, while the third option describes the broader interaction of supply and demand without delving into how demand specifically responds to price. The fourth option focuses on total sales rather than the relationship between quantity demanded and price.