What is meant by "price elasticity of demand"?

What is meant by "price elasticity of demand"?

• A. It measures the fixed demand for a product
• B. It indicates how responsive demand is to price changes
• C. It assesses how much supply can increase
• D. It reflects consumer income changes

Answer: (B)

Price elasticity of demand specifically refers to the responsiveness of consumers to changes in the price of a product or service. When we say that demand is elastic, it means that a small change in price will result in a larger change in the quantity demanded. Conversely, if demand is inelastic, changes in price will have little effect on the quantity demanded.

Understanding price elasticity is crucial for businesses and policymakers as it helps them make informed decisions related to pricing strategies, revenue forecasts, and market behaviors. For instance, if a company knows that the demand for its product is highly elastic, it may opt to keep prices lower to maximize sales volume. On the other hand, if the demand is inelastic, it might decide to raise prices to increase revenue without losing many customers.

The other options do not accurately capture the essence of price elasticity of demand. For example, measuring fixed demand suggests a static view that doesn't consider consumer responsiveness or market dynamics. Assessing supply changes reflects a different concept, primarily related to the supply elasticity. Lastly, reflecting consumer income changes pertains to income elasticity of demand, which is a separate concept focused on how demand shifts in response to changes in consumer income rather than price.