Final answer:
The elasticity of demand measures the responsiveness of consumers to changes in price, indicating how a percentage change in price can lead to a proportional change in quantity demanded, which can be elastic, inelastic, or unit elastic.
Step-by-step explanation:
The elasticity of demand measures the responsiveness of consumers to price changes in a product or service. To compute this, we use the formula which involves dividing the percentage change in quantity demanded by the percentage change in price. The outcome tells us the type of elasticity, whether the demand for the product is inelastic, unit elastic, or elastic.
Moreover, the concept of elasticity is not confined only to price changes. The quantity demanded and quantity supplied can also be affected by various factors like income, tastes, preferences, production costs, and prices of related goods. Elasticity can be measured for these determinants as well, not just for the price.
It's crucial to understand that price elasticity can influence consumer behavior significantly. For luxury items, a price drop may lead to a substantial increase in demand (elastic demand), but for necessities, the change in demand is typically much smaller for the same price change (inelastic demand).