What is price elasticity of demand?

• A. A measure of how advertising affects product demand
• B. A measure of how much supply increases with demand
• C. A measure of consumer sensitivity to price changes
• D. A fixed amount that consumers are willing to pay

Answer: (C)

Price elasticity of demand refers to the degree to which the quantity demanded of a good or service responds to changes in its price. Specifically, it measures how sensitive consumers are to price fluctuations. If a small change in price leads to a large change in the quantity demanded, the demand for that product is considered elastic. Conversely, if a change in price results in little or no change in the quantity demanded, the demand is inelastic. This concept is crucial in understanding consumer behavior and market dynamics, as it helps businesses and economists predict how sales will react to price changes.

In contrast, the other options present concepts that are not related directly to the sensitivity of demand to price changes. Advertising does influence demand, but it doesn't measure the relationship between price and quantity demanded. Supply changes could be affected by demand, but that aspect doesn’t define price elasticity of demand. Lastly, a fixed amount consumers are willing to pay does not account for how demand fluctuates with price changes, which is the essence of elasticity.