What does elasticity of demand evaluate?

Elasticity of demand evaluates the responsiveness of quantity demanded to price changes. This concept measures how much the quantity of a good demanded by consumers changes when there is a change in the price of that good. If the demand is elastic, a small change in price leads to a significant change in the quantity demanded. Conversely, if the demand is inelastic, changes in price result in little change in quantity demanded.

Understanding this responsiveness helps businesses and policymakers make informed decisions about pricing, production, and forecasts based on consumer behavior. It highlights how sensitive consumers are to price changes, which is vital for market analysis and economic planning. For instance, if a product has many substitutes (like soft drinks), its demand tends to be more elastic compared to necessities (like insulin for diabetics), which are usually inelastic since consumers need them regardless of price fluctuations.

This concept clearly distinguishes it from other options, which focus on different aspects of economic analysis, such as supply responsiveness or changes in consumer preferences.