What does price elasticity of demand measure?

Price elasticity of demand measures how responsive the quantity demanded of a good or service is to changes in its price. Specifically, it indicates the percentage change in quantity demanded resulting from a one-percent change in price. A higher price elasticity signifies that consumers are more sensitive to price changes; for instance, if the price of a product increases, a significantly high elasticity would suggest a steep decline in the quantity demanded. Conversely, if the price decreases, a high elasticity indicates a substantial increase in quantity demanded.

Understanding price elasticity is crucial for businesses and policymakers because it helps in making informed decisions regarding pricing strategies, forecasting the effects of pricing changes on revenue, and assessing consumer behavior in response to market fluctuations. This concept is pivotal in determining optimal pricing strategies for maximizing revenues, especially in competitive markets. In this context, the focus on consumer sensitivity to price changes is what makes this measure significant for analyzing demand dynamics.