Laura Coplai
Liberty University
BUSI 620:B01 – Global Economic Environment
Discussion Board 2 – Part 1
1. The demand function for Good X is defined as Qx = 75 – 2Px – 1.5Py where Py is
the price of Good Y. Calculate the price elasticity of demand using the point
formula for Px = 20 and Py = 10. Determine whether demand is elastic, inelastic, or
unit elastic with respect to its own price and whether Good Y is a substitute or a
complement with respect to Good X.
In order to calculate the price elasticity, the first step is to solve the function to get
the first point. Qx = 75 – 2 (20) – 1.5 (10) = 75 – 40 – 15 = 20. The second point will have
to be determined for a change. For example, the price of Good X increased by 15%. This
makes Px increase by = 20 x .15 = 3. Px = 20 + 3 = 23. Therefore, plugging that into the
equation Qx = 75 – 2 (23) – 15 = 75 – 46 – 15 = 14. When the price increases, the
demand will decrease, creating a negative sloping demand curve. However, by creating
these two points, the price elasticity of demand can be determined. The change in Qx is
equal to 14 – 20 = -6. The percentage change in Qx is = -6/20 = -30%. To calculate the
price elasticity, the percentage change in quantity is divided by the percentage increase in
price is equal to -30%/15% = -2. This negative price elasticity illustrates an elastic
demand with respect to its own price. The absolute value of the price elasticity is greater
than 1, and that indicates the demand curve is elastic. In order to determine if Good Y is a
substitute or complement of Good X, Py will be increased by 50%. This makes Py increase
by = 10 x .5 = 5. Py = 10 + 5 = 15. Therefore, Qx = 75 – 2 (20) – 1.5 (15) = 75 – 40 – 22.5
= 12.5. This concludes that when the price of Good Y increases, the quantity of Good X
demanded will decrease. This is a change of 12.5 – 20 = -7.5. The percent change in Qx is
therefore, -7.5/20 = -37.5%. This concludes the
cross point elasticity is (-37.5%/12.5)/(50%/15) = -3/3.33 = -0.90. This cross price
elasticity indicates that the two goods are compliments because “an increase in Py leads
to a reduction in Qx” (Salvatore, 2013, p. 142).
5. How important is saving for a household and the economy? How much should be
saved?
Saving is more important for a household, as some of the options for a household
to save helps the economy. In a household, people save money to prepare for future
events and unforeseen emergencies. In general, people should set aside money from each
paycheck to tap into in case an emergency occurs. This is true, “especially with the
unemployment rate still high and people taking longer to find jobs. That’s why many
financial experts are now recommending having 8-12 months of necessary living expenses
rather than the traditional 3-6” (Carter, 2012). A person can also save by investing in the
economy and government. By doing this, people are able to stimulate the economy but
with a risk on themselves. Before a person decides to put savings into any investments,
they should contact a financial investment expert. The economy can be stimulated by
people spending their money, but as Dunleavey (2008) mentions, the economy can wait
and people should stimulate their savings first. “One of the oldest chestnuts in personal
finance is, ‘Pay yourself first.’ Knocking down high-interest debt and building emergency
savings would top that list” (Dunleavey, 2008, C6). The economy can be stimulated by
different households savings, but overall a household must start the saving process.
References
Carter, E. (2012). 10 common money management mistakes that you’re probably making.
Forbes. Retrieved from
http://www.forbes.com/sites/financialfinesse/2012/08/29/10-common-money-
management-mistakes-that-youre-probably-making/
Dunleavey, M. P. (2008, Jun 28). Economy can wait; stimulate your savings. New York
Times (1923-Current File). Retrieved from
http://search.proquest.com/docview/897120882?accountid=12085
Salvatore, D. (2013). Managerial economics in a global economy (7th ed.). New York,
NY: Oxford University Press.
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