The law of supply and demand says a market's price settles where the quantity buyers want equals the quantity sellers offer. When buyers want more than sellers have, the price rises; when sellers have more than buyers want, it falls. It joins two laws: a higher price cuts the quantity people buy and raises the quantity sellers bring.
Below, both laws are worked on a tomato market in Kampala, in Uganda shillings. The last sections apply them to two weekly decisions in a shop: when to buy, and what to charge.
The law of demand, the law of supply and equilibrium
The law of demand says that when a price rises, people buy less, other things staying the same. The OpenStax textbook Principles of Economics puts it plainly: a price rise "almost always decreases the quantity demanded".
The law of supply runs the other way. When a price rises, sellers bring more to market, because each unit now earns more.
| Term | What it says | Why |
|---|---|---|
| Law of demand | Price up, quantity bought down | Buyers switch to something else, buy smaller amounts or go without |
| Law of supply | Price up, quantity offered up | Each unit earns more, so it pays to bring more |
| Equilibrium | The one price where the two quantities are equal | Nothing is left unsold, and every buyer willing to pay that price is served |
| Surplus | Above equilibrium, more is offered than bought | Sellers cut prices rather than keep the goods |
| Shortage | Below equilibrium, more is wanted than offered | Sellers can ask more and still sell out |
The textbook works the same logic on the market for petrol. Its point holds in any market: a surplus or a shortage is the pressure that pulls the price back to equilibrium.
A worked market: tomatoes in Kampala
For example, suppose these are the tomatoes buyers would take, and traders would bring, at a Kampala produce market each day. The figures are illustrative, not market data.
| Price per kg (UGX) | Buyers would take (kg) | Traders would bring (kg) | Result |
|---|---|---|---|
| 2,000 | 1,400 | 600 | Shortage of 800 kg |
| 2,500 | 1,200 | 800 | Shortage of 400 kg |
| 3,000 | 1,000 | 1,000 | Equilibrium |
| 3,500 | 850 | 1,150 | Surplus of 300 kg |
| 4,000 | 700 | 1,300 | Surplus of 600 kg |
| 4,500 | 600 | 1,400 | Surplus of 800 kg |
At UGX 3,000 a kilo, buyers take exactly the 1,000 kg traders bring. That is the equilibrium price and quantity.
At UGX 4,000, traders bring 1,300 kg but sell only 700. Tomatoes don't keep, so by afternoon traders cut their prices, and the price falls back.
At UGX 2,500, buyers want 1,200 kg and find 800. The tomatoes are gone by mid-morning, so traders ask more the next day.
Movement along a curve vs a shift of the curve
A change in the price moves the market along its curves; a change in anything else shifts a whole curve. A shift means more, or less, is wanted or offered at every price.
OpenStax's next section, on shifts in demand and supply, names what does the shifting. Here is its list, with an example from a shop's week.
| Shifts demand | Shifts supply |
|---|---|
| Income: pay day, harvest money, a downturn | Input prices: fuel, transport, fertiliser, an import's cost after the exchange rate moves |
| Tastes and preferences: a new drink everyone wants | Technology: a faster machine, a better seed |
| Population: a new estate or a school nearby | Natural conditions: rain, drought, a poor harvest |
| Prices of related goods: a cheaper substitute | Taxes and regulations: a new duty or levy |
| Expectations: buyers stocking up before a price rise |
When both curves shift, the price can end where it started. If demand rises first, the price jumps. As suppliers bring more, it returns to its old level at a larger quantity.
The dry season, worked as a supply shift
A dry spell cuts what traders bring at every price, which is a shift of supply, not a movement along it. Suppose it cuts the market's supply by 300 kg a day at each price.
| Price per kg (UGX) | Buyers would take (kg) | Traders bring now (kg) | Result |
|---|---|---|---|
| 3,000 | 1,000 | 700 | Shortage of 300 kg |
| 3,500 | 850 | 850 | New equilibrium |
| 4,000 | 700 | 1,000 | Surplus of 300 kg |
The price rises from UGX 3,000 to 3,500, about a sixth, and the quantity sold falls from 1,000 kg to 850. Buyers did not change; supply did.
What it means for a shop's buying
Many supply shifts can be seen coming: the dry season, a fuel price rise, a falling shilling for imported goods. Watch for them, because they change both your cost and your customers' quantities.
- Buy ahead only what keeps and what will sell. Buying before a price rise pays when the saving beats the cost of holding the stock. The sum is in inventory holding cost.
- Buy less of a perishable when its price jumps. In the dry spell, the market's quantity fell by 15%. Expect your own sales of it to fall too.
- Don't hold an old price after a supply shift. At the old price you have a shortage: the stock goes in a morning and the late customers leave with nothing.
- Read a demand shift in your own sales history. A product selling more at the same price is a shift, which a demand forecast should pick up.
What it means for pricing: the elasticity test
Price elasticity of demand is how strongly buyers react to a price change. OpenStax's section on elasticity and pricing gives the rule: with inelastic demand a price rise lifts revenue, and with elastic demand it lowers it.
For a shop, revenue is the wrong test. Judge a price change on gross profit, as this example shows.
| Case | Price (UGX) | Units a month | Revenue (UGX) | Gross profit (UGX) |
|---|---|---|---|---|
| Before | 5,000 | 200 | 1,000,000 | 200,000 |
| Buyers barely react (units −5%) | 5,500 | 190 | 1,045,000 | 285,000 |
| Buyers react strongly (units −20%) | 5,500 | 160 | 880,000 | 240,000 |
When buyers react strongly, revenue falls 12%, yet gross profit still rises. Each unit now earns UGX 1,500 instead of 1,000, which covers the lost sales.
The break-even rule tells you how many sales a rise can afford to lose. Share of units you can lose = price rise % ÷ (margin % + price rise %), with the margin worked as in markup vs margin.
| Change | Working | Result |
|---|---|---|
| Raise the price 10% | 10 ÷ (20 + 10) | Pays unless you lose more than a third of your units: losing up to 66 of 200 still pays |
| Cut the price 10% | 10 ÷ (20 − 10) | Needs 100% more units, 400 instead of 200, just to earn the same |
The cut is the trap. At a 20% margin, a 10% discount must double sales just to break even.
Where the law bends in a shop
A market finds its price every day; a shop's price sits on a label. So in a shop the law shows up first as empty shelves or unsold stock, and only later as a new price.
A price held below equilibrium, by a rule or by habit, keeps the shortage going. A price held above it keeps the surplus, which in a shop becomes stock that piles up when buyers have less to spend.
Read supply and demand in your own sales
Your till records your own demand, one price change at a time. In ArmPOS, the Product sales report lists each product's Qty sold and Total by date, and exports to Excel (Sales reports).
Compare four weeks before a price change with four weeks after, and you have a rough measure of how strongly your customers react. Leave out weeks with a promotion or an empty shelf, or they will mislead you.
Frequently asked questions
What is the law of supply and demand in simple terms?
When more people want a thing than there is, its price rises; when there is more than people want, its price falls. The price settles where the two quantities match.
What are the four basic laws of supply and demand?
With supply steady, more demand brings a shortage and a higher price, and less demand a surplus and a lower price. With demand steady, more supply brings a surplus and a lower price, and less supply a shortage and a higher price.
What is the difference between a change in demand and a change in quantity demanded?
A change in quantity demanded is a move along the demand curve, caused by the product's own price. A change in demand shifts the whole curve, caused by anything else, such as income or a substitute's price.
What is the equilibrium price?
The one price at which the quantity buyers want equals the quantity sellers offer. In the tomato example it is UGX 3,000 a kilo, with 1,000 kg changing hands.
Should a shop raise prices when its supplier does?
Work it out on gross profit, not on habit. If buyers barely react, passing the rise on keeps your margin; if they react strongly, a smaller rise may earn more.
Prices are the market talking, and your sales record is how you hear it. Create a free ArmPOS account to keep every product's sales by date, quantity and amount. Shops in Uganda can start from ArmPOS in Uganda.
