What does elasticity of demand indicate?

Elasticity of demand measures how the quantity demanded of a good or service responds to changes in its price. When we say demand is elastic, it implies that a small change in price leads to a significant change in the quantity demanded. Conversely, if demand is inelastic, changes in price do not significantly affect the quantity demanded.

Understanding elasticity is crucial for businesses as it helps them make informed decisions regarding pricing strategies. For example, during a price increase for a product with elastic demand, businesses may see a larger drop in sales, whereas a product with inelastic demand may maintain steady sales despite price hikes.

The other options focus on aspects not directly related to the demand elasticity concept. The responsiveness of quantity supplied pertains to supply elasticity, not demand. Overall demand in a market considers all factors affecting demand but does not delve into the specific relationship between price changes and quantity demanded. Lastly, fixed variable costs relate to production economics rather than consumer behavior regarding price changes.