A two-dimensional physical model that employs the deformed mesh method to track the electrolyte level in a Li-air coin cell battery is presented and used to investigate the effects of electrolyte level drop during cell discharge. The electrolyte level drop is caused by solid phase volume decrease and electrolyte solvent evaporation. Simulation results show that by neglecting the drop in electrolyte level, a Li-air battery model would under-estimate cell discharge capacity by as much as 22.5% in the parameter range studied. This counter-intuitive result is explained by an in-depth analysis of simulation results. A more realistic prediction of Li2O2 deposit distribution is obtained, with the peak value of Li2O2 volume fraction in the middle of the cathode instead of on the top surface, as predicted by previous studies. The interaction between the battery and its surroundings is considered by incorporating the air chamber into the computation domain. The diffusion of solvent vapor and oxygen in this chamber is included. For batteries using volatile solvents such as DMF, increasing the air chamber radius from 5 cm to 15 cm would result in a 72% increase of discharge capacity at the cost of losing a large amount of electrolyte.