Markets
Senior 2 · Entrepreneurship
Markets
Lesson 2 of 4
22 min
In the harvest months, tomatoes pile up in markets and the price collapses; a few months later the same tomatoes cost three times as much. A trader who understands why can buy cheap, store or process, and sell when prices recover. A trader who does not keeps losing money at the same times every year. The explanation is the relationship between demand and supply.
Buyers want low prices; sellers want high ones. The equilibrium price is the price at which the quantity demanded equals the quantity supplied: the market “clears”, with nothing left unsold and no buyer left unserved. The quantity traded at that price is the equilibrium quantity.
This case is written by Ganzaa. The daily demand and supply of tomatoes in a town market are:
| Price per kg (Frw) | Quantity demanded (kg) | Quantity supplied (kg) | Result |
|---|---|---|---|
| 200 | 900 | 100 | Shortage of 800 kg |
| 400 | 700 | 300 | Shortage of 400 kg |
| 600 | 500 | 500 | Equilibrium |
| 800 | 300 | 700 | Surplus of 400 kg |
| 1,000 | 100 | 900 | Surplus of 800 kg |
If something other than price changes, the whole schedule changes, and so does the equilibrium:
That is the harvest story: supply increases sharply, so the price collapses. When supply shrinks after the harvest, the price climbs again.
Tip
Exam technique. For any change, say three things in order: which side changes (demand or supply), which direction (increase or decrease), and what happens to price and quantity. A shift in demand moves price and quantity the same way; a shift in supply moves them in opposite ways.
Solution: Supplied 900 kg, demanded 100 kg: a surplus of 900 − 100 = 800 kg. The price will fall.
Solution: Supply decreases, so the price rises and the quantity traded falls.
Solution: Demand increases, so the price rises (and more flour is traded).
Solution: 600 × 500 = 300,000 Frw.
Summary
Sources and credits
The tomato market case, the worked example and the practice items are written by Ganzaa.
This lesson adapts CC BY-SA material and is shared under CC BY-SA 4.0.
