Price sensitivity refers to how much the demand for a product or service changes in response to price changes. When consumers are highly price-sensitive, even a small increase in price can lead to a significant drop in sales. This behavior is often observed in markets where there are many alternatives available, making it easier for consumers to switch to a competitor if prices rise. Factors influencing price sensitivity include the availability of substitutes, the proportion of income spent on the product, and consumer preferences. For example, luxury items typically have lower price sensitivity, while everyday essentials, like groceries, tend to be more price-sensitive. Understanding price sensitivity helps businesses set optimal pricing strategies.