Demand and Supply Analysis
Senior 4 · Economics
Demand and Supply Analysis
Lesson 1 of 5
30 min
The National Institute of Statistics of Rwanda (NISR) reported that in September 2026 the prices of "fresh products" were 27.9% higher than a year earlier, and 7.7% higher than in August alone. Prices of locally produced goods rose by 19.8% in a year, while prices of imported goods rose by 9.7%. Nobody in Kigali sat down and decided those prices. They came out of thousands of markets, from the vegetable stalls of Bugesera to the wholesale depots of Nyabugogo, where buyers and sellers met and agreed. This unit explains how. We start with the two ideas everything else depends on: the market and the price.
Definition
Market: any arrangement that brings buyers and sellers of a good or service into contact so that they can exchange it at a price. It does not need a physical place: mobile-money transfers, phone calls and websites are markets too.
Price: the amount of money paid for one unit of a good or service.
Example: the market for tomatoes in Bugesera is every seller and buyer of tomatoes there, whether they meet at the stall or arrange a sale by phone.
| Basis of classification | Types | Examples |
|---|---|---|
| What is traded | Product (goods and services) markets; factor markets for labour, land and capital; financial and foreign-exchange markets | A produce market; a job advertisement; a bank loan; a forex bureau |
| Area covered | Local, national, regional, international (world) markets | A village market; the national market for cement; the East African Community; the world coffee market |
| Time | Very short period (supply cannot change), short period, long period | Fish landed today; a bakery adding a shift; a new factory being built |
| Degree of competition | Perfect and imperfect markets | Many tomato sellers; one water utility |
| How it is organised | Physical and virtual (online or by phone); spot (pay and deliver now) and futures (agree now, deliver later) | A stall; ordering online; a contract to deliver coffee next season |
Worked example 1: the limits of bargaining (illustrative figures)
A tomato seller will not sell below Frw 400 per kg (her cost plus the least she will accept). A restaurant buyer will not pay more than Frw 550 per kg (the most a kilogram is worth to him). Any price between Frw 400 and Frw 550 benefits both, so a deal is possible; outside that range, it is not.
If they agree on Frw 480:
The total gain from the trade is per kg, whatever the agreed price: bargaining only decides how it is shared. The better bargainer, or the one with more alternatives (other stalls nearby), takes the larger share.
Worked example 2: cost-plus pricing
A tailor's cost of making a school shirt is Frw 3,200 (cloth, thread, electricity and her time). She adds a mark-up of 25%.
Weakness: the method ignores demand. If customers can buy a similar shirt elsewhere for Frw 3,500, she will sell few shirts at Frw 4,000, however carefully she worked out her costs.
| Factor | Effect on price |
|---|---|
| Demand | Higher demand (more buyers, higher incomes) tends to raise the price |
| Supply | A larger supply (a good harvest) tends to lower it; a poor harvest raises it |
| Costs of production | Dearer inputs (fuel, fertiliser, wages) push prices up |
| Government policy | Taxes raise prices; subsidies lower them; price controls fix them |
| Market structure | A monopolist can charge more than firms in a competitive market |
| Transport and distance | For a landlocked country, freight costs add to the price of imports |
| Season and weather | Food is cheap at harvest time and dear just before it |
| Exchange rate | A weaker franc makes imported goods dearer |
| Expectations | Traders who expect prices to rise hold back stock, pushing prices up now |
Worked example 3: measuring how fast prices rose
NISR's urban Consumer Price Index (CPI), an average of the prices of a basket of goods and services (February 2014 = 100), was 190.9 in September 2025 and 223.7 in September 2026.
This matches the 17.2% NISR reports. The index was 217.8 in August 2026, so the rise in one month was
Analysis: local products rose by 19.8% in a year against 9.7% for imported products. The fastest rises were in goods produced at home, which points to domestic supply and demand conditions rather than only to prices abroad.
Warning
"Prices are high" is not an explanation. In an exam, name the force and the direction: "a poor harvest reduced the supply of beans, so at the old price there was a shortage and the price rose." Each factor in the table works through demand, supply or the rules of the market.
Tip
Who sets the price? Ask: is it agreed (bargaining), bid (auction, tender), dictated (government, manufacturer, cartel) or discovered (the price mechanism)? Every method fits one of these four words.
Important
Discuss. Is bargaining in a produce market a waste of time, or does it serve a purpose that fixed prices cannot? Think about who gains, how sellers learn what buyers will pay, and what happens on a day when supply is unusually high.
tutor2u, "Price Determination (Market Equilibrium)". A preview of Lesson 5: watch how the price moves when there is a surplus or a shortage, which is the price mechanism at work.
Practice
Key points
Sources and credits
Written by Ganzaa: the text, the bargaining diagram, the tables, the worked examples and the practice items. The tomato, shirt and avocado figures are illustrative. The photo is shared under CC BY-SA 4.0.
Quick check
Match each method of price determination to its example.
Tap one on the left, then its partner on the right.
