What does price elasticity of demand measure?

Price elasticity of demand measures the responsiveness of the quantity demanded of a product to a change in its price. When the price of a product increases or decreases, price elasticity of demand allows businesses and economists to understand how much the quantity demanded will change in response.

For example, if a small change in price leads to a large change in the amount demanded, the demand for that product is considered elastic. Conversely, if a change in price has little effect on the quantity demanded, the demand is considered inelastic. Understanding price elasticity helps businesses make informed decisions about pricing strategies, production levels, and anticipated consumer behavior, which is crucial for optimizing sales and revenue.

The other options focus on different aspects of economic relationships that do not specifically measure the relationship between price changes and quantity demanded. For instance, the relationship between supply and demand addresses broader market dynamics, fixed costs concern production and operational expenses, and profit margins relate to difference between production costs and selling price rather than demand responsiveness.