Demand and Supply Analysis
Senior 4 · Economics
Demand and Supply Analysis
Lesson 3 of 5
30 min
Rwanda's fifth Population and Housing Census counted 13,246,394 people in August 2022, and found that the population had grown by an average of 2.3% a year since 2012 (NISR). Every one of those extra people needs food, clothing, transport and, in time, a school place and a home. So even if prices did not change at all, the quantities that Rwandans want to buy would keep rising. That is the difference between a movement along a demand curve, caused by the good's own price, and a shift of the whole curve, caused by everything else. Mixing the two up is the most common mistake in A-level economics.
The demand for a good depends on many things, which can be written as a demand function:
where is the good's own price, income, and the prices of substitutes and complements, tastes, population and expectations. The law of demand looks at alone, holding all the others constant.
| Determinant | Change | Effect on the demand curve | Example |
|---|---|---|---|
| Income (normal good) | Income rises | Shifts right | Higher salaries raise demand for meat and bottled water |
| Income (inferior good) | Income rises | Shifts left | A household that can now afford rice buys less of a cheaper staple (illustrative) |
| Price of a substitute | Price of peas rises | Demand for beans shifts right | Buyers switch from peas to beans |
| Price of a complement | Price of fuel rises | Demand for motorcycles shifts left | Running a motorcycle costs more |
| Tastes, fashion and advertising | A good becomes fashionable | Shifts right | A popular style of shoe |
| Population size and structure | More people, or more young people | Shifts right | Growing demand for school uniforms |
| Expectations | Buyers expect prices to rise next month | Shifts right now | Buying extra beans before an expected shortage |
| Credit | Loans become easier to get | Shifts right | Phones and motorcycles bought on credit |
| Season, weather and festivals | Christmas or Eid approaches | Shifts right | Demand for goats, chickens and clothes |
| Government policy | A good is banned or taxed, or consumers are subsidised | Shifts left (ban, tax) or right (subsidy) | Law N° 17 of 2019 banned plastic carry bags, so demand moved to woven and paper bags |
| Distribution of income | Income shared more equally | Demand for basic goods shifts right | More spending on food and clothing |
Definition
Normal good: a good whose demand rises when income rises. Inferior good: a good whose demand falls when income rises, because buyers switch to better alternatives.
Substitutes: goods that can replace each other (beans and peas). Complements: goods used together (motorcycles and fuel).
Definition
Change in quantity demanded: a movement along a demand curve caused only by a change in the good's own price. A rise in quantity demanded is an extension of demand; a fall is a contraction.
Change in demand: a shift of the whole demand curve caused by a change in any other determinant. An increase shifts it right; a decrease shifts it left.
On the left, nothing but the price has changed, so the consumer moves along the same curve. On the right, the price is the same (P), but buyers want more (D₁) or less (D₂) at that price: the relationship itself has changed.
Worked example 1: an increase in demand, in numbers (illustrative)
A town's daily demand for maize flour is . After a rise in wages it becomes .
| Price (Frw per kg) | 100 | 200 | 300 | 400 | 500 |
|---|---|---|---|---|---|
| before (kg) | 800 | 600 | 400 | 200 | 0 |
| after (kg) | 1,000 | 800 | 600 | 400 | 200 |
At every price, 200 kg more is demanded: . The demand curve has shifted 200 kg to the right. Since demand rose with income, maize flour is a normal good for these buyers.
Worked example 2: movement or shift?
| Event | Market | Effect |
|---|---|---|
| The price of beans falls | Beans | Movement down along D: an extension of demand |
| The price of peas falls | Beans | Demand shifts left: buyers switch to the cheaper substitute |
| The price of fuel falls | Motorcycles | Demand shifts right: a complement is cheaper |
| Traders hear that next season's harvest will be poor | Beans | Demand shifts right now: buyers stock up before prices rise |
| Plastic carry bags are banned (Law N° 17 of 2019) | Woven and paper bags | Demand shifts right: a substitute is no longer available |
Method: name the market first, then ask whether the event is that market's own price. If yes, it is a movement; if no, it is a shift.
Warning
A change in a good's own price never shifts its own demand curve. "The price of beans rose, so the demand for beans fell" is wrong: the quantity demanded fell, by a movement along the curve. Write "demand" only for a shift.
Tip
Own price moves you along; everything else shifts the line. For a shift, remember "right = more at every price".
Important
Discuss. Rwanda's population grew by 2.3% a year between 2012 and 2022 (NISR). Which markets would you expect this to affect most, and why might demand for some goods grow much faster than the population?
Jacob Clifford, "Demand and Supply Explained". Watch for the list of things that shift demand, and how he separates a change in quantity demanded from a change in demand.
Practice
Key points
Sources and credits
Written by Ganzaa: the text, the diagrams (the maize-flour curves drawn to scale from their equations), the tables, the worked examples and the practice items. The maize-flour and advertising figures are illustrative.
Quick check
The price of peas falls. What happens in the market for beans, a substitute?
