What is price elasticity of demand?

Price elasticity of demand specifically refers to the responsiveness of the quantity demanded of a good or service to a change in its price. This concept quantifies how sensitive consumers are to price fluctuations. If a product has high price elasticity, a small increase in price may lead to a significant decrease in the quantity demanded, indicating that consumers have many alternatives or that the product is not a necessity.

In contrast, products with low price elasticity may see only a small change in quantity demanded with a significant price change, suggesting that consumers will continue to purchase the product regardless of price fluctuations, often because it’s a necessity or lacks substitutes.

Understanding price elasticity helps businesses and economists forecast consumer behavior in response to price changes, allowing for more informed decisions regarding pricing strategies and market dynamics. This makes the third answer the correct choice, as it directly addresses the core definition and application of price elasticity of demand.