Shallow well - Low pressure

Six years ago, I had my jet pump replaced (1/2 hp Sta-rite, 30/50 pressure switch). I realize (now) that it is installed incorrectly, below the pipe from the well (see the pic. It was simply placed where the old pump was.) The system worked perfectly, until about a week ago, when suddenly the pressure dropped to 20 psi. This happened literally overnight. When I brushed my teeth Saturday night, the pressure was fine, when I turned on the water Sunday morning, the pressure and volume was obviously low. When I checked the pump, I found it running constantly and the pressure gauge read 20 psi. When I turn the pump on after it's been off for awhile, the pressure can get up to about 30 psi, but after I use some water, it drops to about 20 and stays there. The pump itself sounds fine, not making any new clunking noises or anything, and I've cleaned the nozzle to the venturi, so I don't think the problem is the pump. I think I can hear some air in the water when the pump is running, but I've never really listened that carefully before, so I'm not sure.
I have a neighbor who has lost prime in his pump three times this winter, the last time was the same weekend my problem started, so I'm wondering if the water in my well is low. But his wellhead is right next to a creek, and mine is probably about ten feet higher than that, so it seems odd to me that I would still have some water, and he would have none, but I'm no expert, so maybe that's possible?
I'm wondering if I could have some air trapped in the pipe where it heads towards the floor. Could that cause the problem I'm having?
One more thing - some sewer lines are being replaced on a street about 1/2 mile from my house, on the other side of the creek. My neighbor has seen them pump water out of the trenches they have dug.
I know I've rambled on for a while, so If you have read this far, thanks. Most of my knowledge about wells has come in the past week, so any thoughts about why I have suddenly lost pressure would be appreciated.
PS - The ball valve that is closed in the picture is normally open. It is closed in the picture because I was trying to see if the pressure would go up. It doesn't.

Water should never go down to the inlet of a pump. That tee and fittings with the priming cap on the suction side could have an air leak. Hose clamps on the suction side could have an air leak. Everything on the suction side must be air tight.

The best way to tell if you have water in the well is to measure it. If there is water above your foot valve, then you have an air leak.

De-watering in your area could cause a drop in the water level in the well. I would check that out first.

Low Pressure!

Low pressure and pump running constantly usually indicates a plugged or restricted nozzle in the jet assembly. You're pump has a small 1/4" pipe plug just below the suction line on the pump. With the pressure released from the pump and the electric to the pump off, remove the 1/4" plug and run a small rod (less than 1/4") through the plug hole. It should go the length of the Jet assembly body. This should dislodge any restriction in the nozzle. If the rod doesn't go the length of the jet assembly it means the nozzle is plugged with a rock or something unpenitratable. In this case the end of the pump must be removed from this pump, then the venturi must be removed to get to the nozzle. If I remember right you can then unscrew the nozzle from the jet body by using a 3/4" long socket and extention. Clean the nozzle and replace it being careful not to dislodge any rust scale.

NOTE: I don't like the pumps placement below the incoming suction line from the well! It and all the additional required fittings makes the system more susceptible to priming problems and possible suction leaks.

RECOMMENDATIONS: Remount the pump on a stand where the pump suction and check valve goes directly into the well suction line near the basement wall. Remove the Union (it only adds to another possiblesuction leak). This will allow you to remove the priming connections near the basement wall (additional possible leaks). You can then prime the pump at the pipe T plug on top of the pump.

Once everything is working properly again, I suggest that you look into installing a constant pressure valve such as a "Cycle Stop Valve". A CSV gives you a constant pressure (like city pressure), allows you to use a small tank (if you choose) and will extend the life of your pump, pressure switch and tank system.

You should check into a pump bracket that sits on top of the pressure tank that allows setting the pump on it.

And get rid of the check valve on the pump's inlet and if doing so prevents priming of the pump, pull the drop pipe out of the well and replace the foot valve and fix any leaks/holes in the the drop pipe.

As it is plumbed now, you must prime the line going out to the well and them prime the pump separately because of the check valve. Are you doing that?

Porky - I had already cleaned out the nozzle, and didn't find an obstruction, so I didn't think that was the problem, but I decided to clean it again since it's free/quick/easy. To my surprise, this time there was something clogging the nozzle. It was easy to clear with a little gentle jiggling, but I suspect that there is some loose debris that clogs the nozzle every time the pump runs. After cleaning it this second time, the pressure still hovers just above 20psi. I think I may have a new weekend project on my hands to disassemble and clean my pump.

If anyone is still following this post, or stumbles upon it later, I just want to post an update. My problem was indeed a clogged nozzle, and had nothing to do with the well, or the way the water is being piped to the pump from the well (I know the pump should not be below the incoming line, but it seems airtight, so fixing that is a project for another day.) I overhauled the pump and, long story short, the pump is now working just as it used to. Thanks to everyone for your advice regarding the setup of my system. I'll look into your tips, and make changes as time and money allow. I'd like to add that I couldn't have solved this problem without this forum. I had a plumber come out shortly after my problem started, and he thought the pump was fine (all he did was play with the pressure switch. It's obvious to me now that he had no idea the nozzle could be clogged!) and wanted to dig up the well to check the line and and foot valve. You guys saved me at least several hundred dollars! Thanks again!

Glad to hear all is well and thanks for the feedback.