What does elasticity measure in economics?

The concept of elasticity in economics specifically measures the responsiveness of quantity demanded or supplied to changes in price. This responsiveness can indicate how sensitive consumers or producers are to price changes. For instance, if a small change in price leads to a significant change in the quantity demanded or supplied, this reflects high elasticity. Conversely, if price changes lead to little change in quantity, this indicates low elasticity.

Understanding elasticity is crucial for businesses and policymakers because it helps them anticipate how changes in pricing (or external factors) can affect market behavior. For example, products that have close substitutes tend to have higher price elasticity because consumers will easily switch to alternatives if the price rises. This concept is vital for determining pricing strategies, tax policies, and market dynamics.

The other options do not capture the essence of elasticity accurately; total revenue generated from sales does not indicate responsiveness, variability of prices pertains to market fluctuations rather than demand/supply dynamics, and overall income levels of consumers are related to market purchasing power, not the direct relationship between price changes and quantity fluctuations.