What does elasticity of demand measure?

Elasticity of demand measures how responsive the quantity demanded of a good or service is to changes in its price. This concept is fundamental to understanding consumer behavior in economics. When the price of a product changes, the elasticity of demand allows us to analyze the extent to which consumers will adjust their purchasing decisions based on that price change.

For instance, if the price of a good rises and the quantity demanded falls significantly, this indicates that the demand for that good is elastic. Conversely, if there is little change in quantity demanded despite a price increase, the demand is considered inelastic. This responsiveness can be influenced by various factors, including the availability of substitutes, the proportion of income spent on the good, and whether the good is a necessity or a luxury.

By focusing on the relationship between price changes and quantity demanded, elasticity of demand provides valuable insights for businesses, policymakers, and economists regarding pricing strategies and market dynamics.