What does price elasticity measure?

Price elasticity measures the responsiveness of demand to changes in price. It provides insights into how much the quantity demanded of a good or service will change when its price changes by a certain percentage. A high price elasticity indicates that consumers are sensitive to price changes; even a small increase in price could lead to a significant decrease in the quantity demanded. Conversely, if the price elasticity is low, it means that demand is relatively inelastic, so consumers are less affected by price changes.

Understanding price elasticity is crucial for businesses as it helps in pricing strategies and anticipating consumer behavior. For instance, if a product has a high price elasticity, businesses may decide to lower prices to increase sales, whereas for products with inelastic demand, they might increase prices without fearing a significant drop in sales.

Other options touch on different aspects of economics but do not capture the essence of price elasticity specifically. The stability of prices relates more to market conditions rather than elasticity, while income levels pertain to the purchasing power and not directly to how demand responds to price changes. The relationship between supply and demand provides a broader view of market dynamics but does not specifically focus on how demand reacts to price variations. Thus, the correct understanding of price elasticity is central to effective pricing and market strategy.