What is price elasticity a measure of?

Price elasticity is a measure of how sensitive the quantity demanded of a good or service is to changes in its price. When we talk about demand, price elasticity specifically quantifies the responsiveness of consumers to price fluctuations. If the price of an item increases and consumer demand decreases significantly, the product is considered to have high price elasticity.

Understanding price elasticity helps businesses and economists make informed decisions about pricing strategies, inventory management, and market analysis. For example, if a product is determined to have elastic demand, a small increase in price could lead to a substantial decrease in quantity sold, impacting revenue negatively. Conversely, inelastic demand indicates that changes in price have little effect on the quantity demanded.

The other options pertain to different concepts that are not directly related to price elasticity regarding consumer demand and pricing dynamics. For instance, the sensitivity of supply to price changes relates to supply elasticity, while fixed costs and competition dynamics outline different economic measures that do not focus on the relationship between price changes and consumer demand.