What does elasticity of demand measure?

Elasticity of demand measures how much the quantity demanded of a good or service responds to changes in price. Specifically, it quantifies the percentage change in quantity demanded resulting from a one percent change in price. In this context, if the price of a product increases or decreases, the elasticity of demand provides insight into whether consumers will significantly alter their purchasing habits based on that price change.

This concept is crucial for understanding consumer behavior and can impact pricing strategies for businesses. For example, if demand is elastic, a small price change could lead to a large change in the quantity demanded, whereas if demand is inelastic, consumers may continue purchasing regardless of price fluctuations. This relationship highlights the sensitivity of consumers to price changes and is essential for making informed economic decisions.