What does elasticity of demand measure?

Elasticity of demand measures the responsiveness of quantity demanded to price changes, which is a fundamental concept in economics. When we say demand is elastic, we mean that a small change in price will result in a significant change in the quantity demanded by consumers. Conversely, if demand is inelastic, changes in price will lead to minimal changes in quantity demanded.

This concept helps businesses and policymakers understand consumer behavior regarding price fluctuations. For example, if the price of a product rises and the quantity demanded decreases significantly, this indicates that the demand for that product is elastic. This responsiveness is crucial for firms when setting prices, as well as for governments when considering taxes or subsidies.

The other options focus on different economic concepts. The first option refers to the supply side rather than demand. The third option discusses GDP growth, which is a measure of economic performance but does not relate to how consumers respond to price changes. The fourth option pertains to fiscal policy and its effects on inflation, which is a different area of economic analysis altogether. Thus, the choice that accurately captures the measure of elasticity of demand is the one concerning responsiveness of quantity demanded to price changes.