Answer to Question #322815 in Microeconomics for Gabby

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 Wil affect the demand for meat, which is a normal good.also equilibrium price and equilibrium quantity will change in country A. The direction of any changes should be clearly indicated using arrows

Answer 1

An increase in prices in country A without an equivalent increase in real income results in decreased income levels. The purchasing power is reduced because the prices of commodities are higher than the actual amount of income. Therefore the reduced level of income leads to a change in the level of consumption whereby only the felt and basic needs are catered for by the population. Meat being a normal good, its demand will reduce due to the availability of substitute goods for meat, which are less expensive.

The equilibrium price and the equilibrium quantity will fall due to decreased level of real income. Both quantities supplied and demand for the goods will also decrease since there is low income.