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

Because the country's inflation rate causes a fall in real income levels, the money earned after adjusting to inflation decreases. Because meat is a common good with a positive relationship between income and demand, this will result in a fall in demand.

This is demonstrated in the graph below.