Market equilibrium and how it changes – Demand and Supply Analysis (Senior 4 Economics) | Ganzaa

Demand and Supply Analysis

Lessons

Senior 4 · Economics

Demand and Supply Analysis

5 lessons

Lesson 5 of 5

Market equilibrium and how it changes

35 min

Where the two curves meet

In September 2026, NISR recorded that "fresh products" cost 7.7% more than in August, and 27.9% more than a year earlier. Food and non-alcoholic drinks were up 20.9% on the year, transport 22.4% and energy 45%. To explain movements like these you need both halves of the market at once. Demand on its own says what buyers want; supply on its own says what sellers offer. The price that actually rules is where they agree. This lesson finds that price in three ways, from a schedule, a graph and equations, and then uses it to predict what happens when demand or supply changes.

Definition

Equilibrium: a state of balance with no tendency to change. Market equilibrium is reached at the price where quantity demanded equals quantity supplied.

Equilibrium price ( $P^{*}$ ): the price that clears the market. Equilibrium quantity ( $Q^{*}$ ): the quantity bought and sold at that price.

Excess supply (surplus): quantity supplied is greater than quantity demanded, at a price above $P^{*}$ . Excess demand (shortage): quantity demanded is greater than quantity supplied, at a price below $P^{*}$ .

1. Equilibrium from a schedule

The daily market for tomatoes in a district town combines the supply of Lesson 4 with a market demand schedule (illustrative figures).

Price (Frw per kg)	Quantity demanded (kg)	Quantity supplied (kg)	Situation	Pressure on price
100	1,400	200	Shortage of 1,200	Up
200	1,200	600	Shortage of 600	Up
300	1,000	1,000	Equilibrium	None
400	800	1,400	Surplus of 600	Down
500	600	1,800	Surplus of 1,200	Down

2. Equilibrium on a graph

How the market gets there. At Frw 400, sellers are left with 600 kg unsold; rather than let tomatoes rot, they cut prices, which raises the quantity demanded and lowers the quantity supplied until the surplus is gone. At Frw 200, 600 kg of buyers go without; they offer more, sellers raise prices, and the shortage closes. Only at Frw 300 does no one have a reason to change the price.

Worked example 1: equilibrium from equations

Demand: $Q_d = 1\,600 - 2P$ . Supply: $Q_{s} = - 200 + 4 P$ .

Step 1 At equilibrium $Q_{d} = Q_{s}$ :

1\,600 - 2P = -200 + 4P

Step 2 Collect terms: $1\,600 + 200 = 4P + 2P$ , so $6P = 1\,800$ and

P^* = \text{Frw } 300

Step 3 Substitute into either equation (use both as a check):

Q_d = 1\,600 - 2(300) = 1\,000 \qquad Q_s = -200 + 4(300) = 1\,000

Q^* = 1\,000 \text{ kg a day}

Step 4 Excess at another price, say Frw 450: $Q_{d} = 700$ , $Q_s = 1\,600$ , so there is a surplus of $1\,600 - 700 = 900$ kg.

3. Effects of changes in demand and supply

When something shifts demand or supply, the old equilibrium E₀ no longer clears the market, and the price moves to a new equilibrium E₁. The four basic cases:

Change	Equilibrium price	Equilibrium quantity
Increase in demand	Rises	Rises
Decrease in demand	Falls	Falls
Increase in supply	Falls	Rises
Decrease in supply	Rises	Falls

When both curves shift at once, one of the two results cannot be predicted without knowing the sizes of the shifts:

Changes	Price	Quantity
Demand up, supply up	Uncertain	Rises
Demand down, supply down	Uncertain	Falls
Demand up, supply down	Rises	Uncertain
Demand down, supply up	Falls	Uncertain

Worked example 2: the new equilibrium after a shift

(a) Demand rises (more people in town) to $Q_d = 1\,900 - 2P$ , supply unchanged:

1\,900 - 2P = -200 + 4P \Rightarrow 6P = 2\,100 \Rightarrow P^* = 350,\ Q^* = 1\,900 - 700 = 1\,200

Price up by Frw 50, quantity up by 200 kg: as the table predicts.

(b) Supply falls (a poor harvest) to $Q_{s} = - 560 + 4 P$ , demand unchanged:

1\,600 - 2P = -560 + 4P \Rightarrow 6P = 2\,160 \Rightarrow P^* = 360,\ Q^* = 1\,600 - 720 = 880

Price up by Frw 60, quantity down by 120 kg. Note that at the old price of Frw 300 the shortage would be $1\,000 - (-560 + 1\,200) = 1\,000 - 640 = 360$ kg, which is what drives the price up.

Worked example 3: reading Rwanda's 2026 food prices with the model

NISR's September 2026 CPI shows: fresh products +27.9% on the year and +7.7% in one month; energy +45% and transport +22.4% on the year; local products +19.8% against imported products +9.7%.

Possible explanations, sorted by curve:

Supply of food decreases (shifts left): dearer energy and transport raise the cost of moving food from farms to towns; a weak harvest would cut supply directly. Both raise price and lower quantity.
Demand for food increases (shifts right): a growing population and rising incomes. This raises price but also raises quantity.

Judgement: a jump of 7.7% in a single month is far too fast to come from population growth of about 2.3% a year (NISR, census 2022), so a fall in supply, through costs or the harvest, is the more likely main cause. To confirm it, an economist would check whether the quantities of food sold fell (supply shift) or rose (demand shift): price data alone cannot tell the two apart.

Warning

Do not shift a curve and then shift it back. A common wrong chain: "demand rises, so price rises, so demand falls". The price rise causes a movement along the new demand curve (a contraction in quantity demanded), not a second shift. Shift once, find the new crossing point, and stop.

Tip

Four-step diagram answer: (1) draw D₀, S₀ and E₀; (2) decide which curve the event shifts, and which way; (3) draw the new curve and mark E₁; (4) read off the new P and Q and explain the shortage or surplus at the old price.

Important

Discuss. In Worked example 3, what further data would you ask NISR or MINAGRI for, to decide whether Rwanda's 2026 food price rise came mainly from supply or from demand?

CrashCourse, "Supply and Demand: Crash Course Economics #4". Watch for how the hosts shift one curve at a time and read off the new equilibrium, then try the same steps with the four diagrams above.

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Practice

Define equilibrium price, excess demand and excess supply.
Explain how a surplus at a price above equilibrium is removed.
Demand is $Q_{d} = 120 - 3 P$ and supply $Q_{s} = 20 + 2 P$ . Find the equilibrium price and quantity.
Using the same equations, find the shortage or surplus at $P = 15$ and at $P = 25$ .
With a diagram, explain the effect on the market for beans of a good harvest.
Demand for school uniforms rises before the school year starts, while new tailors also enter the market. What happens to the equilibrium price and quantity? Explain.
In the tomato market ( $Q_d = 1\,600 - 2P$ , $Q_{s} = - 200 + 4 P$ ), a cost increase changes supply to $Q_{s} = - 380 + 4 P$ . Find the new equilibrium.
"A rise in the price of a good is always caused by a rise in demand." Discuss.

Show answersHide answers

Equilibrium price: where quantity demanded equals quantity supplied. Excess demand: quantity demanded exceeds quantity supplied (below equilibrium). Excess supply: quantity supplied exceeds quantity demanded (above equilibrium).
Sellers with unsold stock cut prices; quantity demanded rises (extension) and quantity supplied falls (contraction) until they are equal.
$120 - 3P = 20 + 2P \Rightarrow 5P = 100 \Rightarrow P^* = 20$ ; $Q^{*} = 120 - 60 = 60$ .
At 15: $Q_{d} = 75$ , $Q_{s} = 50$ : shortage of 25. At 25: $Q_{d} = 45$ , $Q_{s} = 70$ : surplus of 25.
Supply shifts right; at the old price there is a surplus, so the price falls; the new equilibrium has a lower price and a larger quantity.
Both demand and supply increase: the quantity sold rises, but the price may rise, fall or stay the same, depending on which shift is larger.
$1\,600 - 2P = -380 + 4P \Rightarrow 6P = 1\,980 \Rightarrow P^* = 330$ ; $Q^* = 1\,600 - 660 = 940$ kg.
False as a general rule: a fall in supply (poor harvest, higher costs, a tax) also raises price, while quantity falls. Price rises can come from either side; to tell them apart, look at what happened to quantity.

Quick check

Key points

Equilibrium is where quantity demanded equals quantity supplied; find it from a schedule, a graph, or by solving $Q_{d} = Q_{s}$ .
Above $P^{*}$ there is a surplus and the price falls; below it there is a shortage and the price rises.
Demand up: P and Q up. Demand down: both down. Supply up: P down, Q up. Supply down: P up, Q down.
When both curves shift, one of P or Q is uncertain; quantity data help tell supply shocks from demand shocks.

1Where the two curves meet

21. Equilibrium from a schedule

32. Equilibrium on a graph

43. Effects of changes in demand and supply

Where the two curves meet

1. Equilibrium from a schedule

2. Equilibrium on a graph

3. Effects of changes in demand and supply