Mg alloys have spurred a renewed academic and industrial interest because of their ultra-light-weight and high specific strength properties. Hexagonal close packed Mg has low deformability and a high plastic anisotropy between basal and non-basal slip systems at room temperature. Alloying with Li and other elements is believed to counter this deficiency by activating non-basal slip by reducing their nucleation stress. In this work I study how Li addition affects deformation mechanisms in Mg using atomistic simulations. In the first part, I create a reliable and transferable concentration dependent embedded atom method (CD-EAM) potential for my molecular dynamics study of deformation. This potential describes the Mg-Li phase diagram, which accurately describes the phase stability as a function of Li concentration and temperature. Also, it reproduces the heat of mixing, lattice parameters, and bulk moduli of the alloy as a function of Li concentration. Most importantly, our CD-EAM potential reproduces the variation of stacking fault energy for basal, prismatic, and pyramidal slip systems that influences the deformation mechanisms as a function of Li concentration. This success of CD-EAM Mg-Li potential in reproducing different properties, as compared to literature data, shows its reliability and transferability. Next, I use this newly created potential to study the effect of Li addition on deformation mechanisms in Mg-Li nanocrystalline (NC) alloys. Mg-Li NC alloys show basal slip, pyramidal type-I slip, tension twinning, and two-compression twinning deformation modes. Li addition reduces the plastic anisotropy between basal and non-basal slip systems by modifying the energetics of Mg-Li alloys. This causes the solid solution softening. The inverse relationship between strength and ductility therefore suggests a concomitant increase in alloy ductility. A comparison of the NC results with single crystal deformation results helps to understand the qualitative and quantitative effect of Li addition in Mg on nucleation stress and fault energies of each deformation mode. The nucleation stress and fault energies of basal dislocations and compression twins in single crystal Mg-Li alloy increase while those for pyramidal dislocations and tension twinning decrease. This variation in respective values explains the reduction in plastic anisotropy and increase in ductility for Mg-Li alloys.