Answer to Question #313720 in Microeconomics for jay

Question

Due to substantial increases in prices in Country A, the real income level of the population in Country A decreases. Show on a diagram how the decrease in the income level in Country A will affect the demand for 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

Increase in prices of commodities in a country without an equal increase in the real income leads to a reduction in real income. In this case, the prices of commodities cost more than the money, which the citizens earns. Automatically, this leads to reduction in real income because prices are high. Higher prices causes a reduction in consumer patterns where customers will reduce consumption of goods and concentrate only on the mandatory or basic needs. The demand for meat will reduce since there are other substitute of meat, which are cheaper than meat.

A decrease in real income will lead to a fall in equilibrium price and quantity. Quantity supplied will decrease with the demand of the goods also decreasing since there exist little real income to purchase the goods and services.