Answer to Question #311353 in Microeconomics for smiley

Question

due to substantial increase in prices in country A ,the real income level of the population in country A decreases .show a diagram how the decrease in the income level in country A will affect the demand of meat ,which is a normal good .Also indicate how the equilibrium price and equilibrium quantity of meat will change in country A . The direction of any changes should be clearly indicated using arrows .Note that your diagrams should be properly annotated and that marks will be deducted for any missing labels on your diagram

Answer 1

Answer

The decrease in income level will lead to a decrease in demand for meat as the price will be relatively higher.

The decrease in demand will shift the demand curve to the left from D₀ to D₁ as indicated in the diagram below.

A shift in demand to the left will shift the equilibrium point from E₀ to E₁ which is lower compared to the original. The lower price will create a surplus in the market and thus cause a movement along the supply curve to the left indicating a lower supply. All this will lead to creation of a new market equilibrium with quantity reducing from Q₀ to Q₁ and price also reducing from P₀ to P_1.