Market, Product, Demand and Supply

1Why this matters

At Kimironko market in Kigali, hundreds of sellers set out tomatoes, avocados, beans and fabric every morning, and thousands of buyers bargain with them. No one tells the sellers how many tomatoes to bring or what to charge; prices and quantities settle through the choices of buyers and sellers. Every entrepreneur has to understand this system, because a business that ignores what buyers want, or what rivals supply, does not survive long.

2Market

A market is any arrangement that allows buyers and sellers to exchange goods, services or information. It does not have to be a place:

• a physical place, such as Kimironko market, a supermarket or a weekly cattle market;
• a phone or online arrangement, such as ordering food through an app and paying by MoMo;
• a labour market, where people sell their work to employers in exchange for wages.

Each exchange of a product for money (or for another product) is a transaction. Through many transactions, the market sets prices.

3Product

A product is anything offered in a market to satisfy a need or a want. It may be a good, which is tangible (you can touch it: a bag of rice, a phone), or a service, which is intangible (a haircut, a moto ride, a mobile-money transfer).

4Demand

Demand is the quantity of a product that buyers are willing and able to buy at a given price during a given period. Wanting is not enough: a student who would love a 400,000 Frw laptop but has no money creates no demand for it. Desire backed by the ability to pay is called effective demand.

Demand for a product depends on:

• its price;
• buyers’ incomes;
• tastes and fashion;
• the prices of substitutes (products used instead, e.g. rice for Irish potatoes) and complements (products used together, e.g. a phone and airtime);
• the number of buyers;
• seasons and events (school uniforms in January, goats before a festival);
• expectations about future prices.

5Supply

Supply is the quantity of a product that sellers are willing and able to offer for sale at a given price during a given period. It depends on:

• the product’s price;
• the costs of production (seed, fertiliser, fuel, wages);
• technology;
• weather and seasons, for farm products;
• the number of sellers;
• government action, such as taxes (which raise costs) and subsidies (which lower them).

Worked example: reading a demand schedule

This case is written by Ganzaa. A demand schedule is a table of the quantities buyers want at different prices. Here is one for avocados at a Kigali market on a typical day:

1. As the price rises from 100 to 400 Frw, the quantity demanded falls from 800 to 200.
2. Every 100 Frw rise cuts demand by 200 avocados: some buyers buy fewer, and some switch to substitutes such as bananas.
3. At 300 Frw, sellers who sell all 400 avocados demanded receive 300 × 400 = 120,000 Frw.

Practice