What is price elasticity of demand?

• A. A measure of how supply changes with demand
• B. A measure of how the quantity demanded responds to price changes
• C. A method of setting prices for products
• D. A concept related to government price controls

Answer: (B)

Price elasticity of demand is defined as a measure of how the quantity demanded of a good or service responds to changes in its price. This concept is crucial in understanding consumer behavior; when the price of a product increases, how much does the quantity demanded decrease, and vice versa? If the demand is elastic, a small change in price leads to a larger change in the quantity demanded. Conversely, if the demand is inelastic, quantity demanded changes little with price fluctuations.

This understanding is important for businesses and policymakers alike, as it informs pricing strategies, revenue projections, and market outreach efforts. For instance, if a company identifies that demand for its product is highly elastic, it may choose to lower prices to increase overall revenue by attracting more customers.

The other options relate to different economic concepts. One option addresses supply rather than demand, while another mentions pricing methods which are distinct from understanding demand responsiveness. Additionally, the option concerning government price controls pertains more to regulatory actions rather than the fundamental consumer behavior captured by price elasticity. Thus, the correct choice encapsulates the essence of the relationship between price changes and consumer demand.