The concept of price elasticity of demand measures:
the slope of the demand curve.
the number of buyers in a market.
the extent to which the demand curve shifts as the result of a price decline.
the sensitiveness of quantities demanded to price changes.
The Correct Answer and Explanation is:
The correct answer is:
the sensitiveness of quantities demanded to price changes.
Explanation:
Price elasticity of demand is an important concept in economics that measures how much the quantity demanded of a good or service changes in response to a change in its price. More precisely, it quantifies the responsiveness or sensitivity of consumers to price changes.
When the price of a product increases or decreases, consumers usually adjust the amount they buy. Price elasticity of demand tells us whether this adjustment is large or small. It is calculated as the percentage change in quantity demanded divided by the percentage change in price: Price Elasticity of Demand=% Change in Quantity Demanded% Change in Price\text{Price Elasticity of Demand} = \frac{\%\ \text{Change in Quantity Demanded}}{\%\ \text{Change in Price}}
- If the elasticity is greater than 1 (in absolute value), demand is said to be elastic, meaning consumers are very responsive to price changes. For example, luxury goods often have elastic demand because buyers can delay or avoid purchases if prices rise.
- If the elasticity is less than 1, demand is inelastic, meaning consumers are less responsive to price changes. Necessities like insulin or basic food items tend to have inelastic demand since people need to buy them regardless of price changes.
- If elasticity equals 1, demand is unit elastic, indicating proportional responsiveness.
This concept does not measure the slope of the demand curve directly. While the slope and elasticity are related, the slope is the absolute change in price per unit change in quantity, whereas elasticity is a relative, percentage-based measure and thus more useful for comparing responsiveness across different goods and markets.
Price elasticity of demand helps businesses and policymakers predict how changes in price will affect total revenue and consumption patterns. For instance, if demand is elastic, lowering prices might increase total revenue by boosting quantity sold, whereas with inelastic demand, raising prices might increase revenue since quantity demanded won’t fall much.
In summary, price elasticity of demand is about how sensitive buyers are to price changes, not just about the demand curve’s shape or market size.
