What does "elasticity" in supply and demand measure?

Elasticity in supply and demand specifically measures how responsive the quantity demanded or supplied of a good is to changes in its price. When examining demand elasticity, it reflects how consumers change their buying habits in response to price changes. If a slight change in price leads to a significant change in demand, the demand for that product is considered elastic. Conversely, if price changes result in little effect on demand, it is inelastic.

Understanding elasticity is crucial for businesses and policymakers as it helps them predict consumer behavior and adjust pricing strategies accordingly. It also impacts revenue—if demand is elastic, lowering prices can lead to a higher total revenue because more units are sold. In contrast, when demand is inelastic, raising prices may not significantly decrease sales and can increase total revenue.

The correct answer captures the essence of elasticity as it pertains to demand and price changes, making it a fundamental concept in understanding market dynamics.