A Level Economics AQA Practice Exam

What does price elasticity of demand measure?

1. The responsiveness of demand to changes in the income level

2. The change in price as a response to demand shifts

3. The responsiveness of quantity demanded to changes in price

4. The total demand at varying price levels

The correct answer is: The responsiveness of quantity demanded to changes in price

Price elasticity of demand measures the responsiveness of quantity demanded to changes in price. This concept is fundamental in understanding consumer behavior and how it reacts to price changes. When the price of a good or service changes, the quantity that consumers are willing to buy will also change, and the degree of that change is what elasticity quantifies. For instance, if a product is price elastic, a small change in price will lead to a significant change in the quantity demanded. This can happen with non-essential goods that consumers can forego when prices rise. Conversely, if a product is price inelastic, it means that quantity demanded changes very little in response to price changes, typically seen in essential goods where consumers need to purchase them regardless of price fluctuations. Understanding price elasticity is crucial for businesses and policymakers, as it helps in setting prices and predicting how changes in the market (like economic downturns or booms) may affect demand.