In economic terms, what does "elasticity" refer to?

Elasticity in economic terms specifically refers to the responsiveness of quantity demanded or supplied when there is a change in price. The concept of elasticity measures how much the quantity demanded of a good or service will change in response to a change in its price. A high elasticity indicates that consumers will significantly change the quantity they buy as price changes, while low elasticity suggests that price changes have little effect on the quantity demanded.

This measurement is crucial in understanding consumer behavior and is essential for businesses when setting pricing strategies. For example, if a product is deemed elastic, a price increase might lead to a substantial drop in sales, while a price decrease could significantly boost sales. Therefore, recognizing this relationship helps businesses make informed decisions regarding pricing, production levels, and marketing strategies.

The other options do not accurately capture the definition of elasticity. For instance, the capacity to produce more goods relates more to production capacity and supply, not consumer responsiveness to price changes. Stability of prices over time speaks to market conditions rather than demand sensitivity to price variations. Lastly, the ratio of supply to demand describes the balance between how much of a product is available and how much consumers want, rather than the changes in quantity demanded based on price fluctuations.