What does Price Elasticity of Demand (PED) measure?

Price Elasticity of Demand (PED) measures the responsiveness of the quantity demanded of a good or service to changes in its price. When the price of a product increases or decreases, PED assesses how much the quantity demanded will change as a result. If the PED is greater than one, the demand is considered elastic, meaning a small change in price leads to a large change in quantity demanded. Conversely, if the PED is less than one, demand is inelastic, indicating that changes in price do not significantly affect the quantity demanded.

Understanding this concept is crucial for businesses and policymakers, as it informs decisions regarding pricing strategies and taxation. For instance, if a product has elastic demand, lowering the price could significantly boost total revenue, while increasing the price might lead to a substantial drop in sales. Thus, the statement regarding the change in quantity demanded in response to a price change accurately captures the essence of what PED represents.