Market Equilibrium Topic

Module-9
M arket equilibrium :
The invisible hand
TEACHER’S GUIDE
P. 265 Defined
P. 271 Content standards
P. 271 Materials
P. 272 Procedure
P. 276 Closure
P. 277 Assessment
P. 287 Overheads
P. 298 2Answer key
Visuals N
Visuals for overhead projector.
Copy to transparent paper for overhead.
P. 282 NVisual-1:Supply
P. 283 NVisual-2:Demand
P. 284 NVisual-3:Equilibrium defined
P. 285 NVisual-4:Shortage
P. 286 NVisual-5:Surplus
Lessons 2
Copy and handout to students.
P. 288 2Lesson-I: Equilibrium

P. 294 2Lesson-II: CD equations
P. 296 2Lesson-III: CD schedule
Market equilibrium
Module-9 The invisible hand
Teacher
DEFINED
B abysitting is often a source of income for many teenagers. What

influences a teenager’s decision to babysit? How does a parent
choose whether to hire a babysitter? In a community, how much
babysitting occurs? In a market oriented economy, the interaction
between supply and demand, producer and consumer, determines
quantity and price.
Supply
The supply curve relates the price and quantity of a good produced.
In the case of babysitting, the supply curve relates the hours of babysitting
community teenagers will provide at various hourly wages or prices.
Recall that supply curves are almost always upward sloping.
Demand
The quantity of a commodity purchased is based largely on price,

income, and the price of related goods. The demand curve relates how
many hours of babysitting will be purchased by neighboring parents at
each hourly wage. Recall that the law of demand requires that demand
curves are downward sloping.
Equilibrium
What determines how much of a commodity will be consumed and

provided at any point in time? We have seen on the supply and demand
graphs – with price per unit on the y-axis and quantity or number of
units on the x-axis – that the supply curve is upward sloping (a positive
relationship) and the demand curve is downward sloping (a negative
relationship). Where the supply and demand curves intersect is the
equilibrium point. At this point, quantity demanded is exactly equal to
quantity supplied.
The following example provides the mathematical background for
the supply and demand curves and derives the equilibrium price and
quantity. You may wish to teach using the mathematical calculations or
you can teach a more abstract equilibrium using the supply and demand
from previous modules without the mathematical derivations.
The schedule below shows that the quantity supplied and the
Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices 265

Market equilibrium
Teacher
quantity demanded are equal at $4 per hour. This is the intersection of

supply and demand in the graph. At $4 per hour babysitters are willing
to provide 80 hours of babysitting per week and parents are willing to
purchase 80 hours of babysitting per week.
Mathematical derivations
Weekly Supply and Demand for

Babysitting
Quantity Price per Quantity
Supplied Hour Demanded
40 2 140
80 4 80
120 6 20
266 Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices

Market equilibrium
Teacher
Mathematically this can be shown with the supply curve that is the
function: QS = 20P where, QS is the quantity supplied at each price, P
The demand curve is the function: QD = 200-30P
QD is the quantity demanded at each price, P.
Notice: The functions for the supply and demand curves have the
quantity on the left side of the equation rather than price, as inferred by
the graph. Conventionally, demand and supply curves are graphed with
price on the vertical axis and quantity on the horizontal axis, even though
mathematically the quantity is on the left side and price is in the right
side. Furthermore, notice the supply curve has a positive slope because of
the positive coefficient on price. The demand curve is negatively sloped
because of the negative coefficient on price.
Mathematically the equilibrium can then be calculated by setting the equation

for quantity supplied equal to the equation for quantity demanded:
QS = QD
20P = 200-30P
Solve for P to find the equilibrium price.
50P = 200
P=4
The equilibrium quantity can then be calculated by substituting the

equilibrium price of $4 for P in the equations and solving for quantity
supplied, QS, or quantity demanded QD.
QS = 20(4) = 80
QD = 200-30(4) = 80
But how do babysitters know they should charge $4 per hour? And
how do parents know they should pay $4 per hour? A shortage puts
upward pressure on price. Imagine if the wage for babysitting was only
$2 per hour. Would you babysit for $2 per hour?
The table and graph below show that teenagers will provide only
about 40 hours of babysitting for a wage of $2 per hour. This is the point
where the price of $2 per hour intersects the supply curve. At this low

Market equilibrium
Teacher
wage, however, parents would like to hire many hours of babysitting.

This is shown where the $2 hourly wage intersects the demand curve
at 140 hours. The result is a shortage of 100 hours. The shortage is
the difference between the quantity demanded of 140 hours and the
quantity supplied of only 40 hours.
Mathematically:
QS = 20P, so at a price of $2 QS = 40 hours.
QD = 200-30P,
then at a price of $2 QD = 140 hours
QD > QS
The shortage will encourage parents to offer a higher price to find

a babysitter. The higher price will encourage teenagers to babysit
more. The higher price will result in northeasterly movement along the
supply curve and more quantity supplied. The higher price will also
result in an northwesterly movement along the demand curve so the
quantity demanded declines. Because the higher price increases the
quantity supplied and reduces the quantity demanded, the shortage
will diminish. The price increase will continue until the shortage is
eliminated and quantity supplied equals quantity demanded. This
is where the market is in equilibrium, at a price of $4 per hour and
quantity of 80 hours.

Market equilibrium
Teacher
A surplus puts downward pressure on price
Imagine the wage for babysitting was $6 per hour. We can see from
the table and graph below that more hours of babysitting will now be
provided (120 hours, where the new $6 hourly wage intersects the
supply curve). At this wage, parents are not willing to hire as many hours
of babysitting (only 20 hours, where the $6 wage intersects the demand
curve). The result is a surplus of 100 hours (120 quantity supplied less
the 20 quantity demanded).
Weekly Supply and Demand for

Babysitting
Quantity Quantity
Price per Hour
Supplied Demanded
40 2 140
80 4 80
120 6 20
Surplus: Weekly Supply and Demand for Babysitting

Market equilibrium
Teacher
Mathematically:
QS = 20P, so at $6 per hour QS = 120 hours

QD = 200-30P,
then at $6 per hour QD = 20 hours
QD < QS
Babysitters begin to realize that to find employment they may need

to lower their wages. Parents realize they can reduce the wage paid
and still obtain the babysitting services. As the price of babysitting is
reduced, the quantity supplied declines and the quantity demanded
increases. Eventually, the market moves into an equilibrium position
where quantity supplied equals quantity demanded. When there is a
surplus there will be downward pressure on price.
A firm’s profit maximizing behavior is manifested in the supply
curve. Consumer desires are manifested in the demand curve. The
determination of price and quantity of the commodity is determined by
the market through the interaction of supply and demand. Therefore,
the market transmits information between producers and consumers,
such that the quantity consumed is equal to the quantity produced.
The Invisible Hand
Through this mechanism, firms satisfy consumers. By meeting

producer goals, producers benefit society: They do well by doing good.
The eighteenth century economist and moral philosopher, Adam Smith,
labeled this market mechanism the invisible hand. No central planning is
necessary to coordinate buyers and sellers. Prices, the cost of production,
and consumer willingness to pay are all signals to firms. Firms respond
by producing those goods and services where there is a potential profit
because of consumers’ willingness to purchase.
CONCEPTS
1. Equilibrium
2. Surplus (excess supply)
3. Shortage (excess demand)
4. The invisible hand

Market equilibrium
Teacher
OBJECTIVES
1. Understand the economic meaning of equilibrium.
2. Realize that price signals producers and consumers.
3. Know the difference between a shortage and a surplus in the
market.
4. Understand the naturally occurring corrective mechanisms in
markets; the invisible hand.
CONTENT STANDARDS
National Content Standards in Economics
1. (Standard 2) Effective decision making requires comparing the

additional costs of alternatives with the additional benefits.
2. (Standard 3) Different methods can be used to allocate goods and
services.
3. (Standard 5) Voluntary exchange occurs only when all participating
parties expect to gain.
4. (Standard 7) Markets exist when buyers and sellers interact.
5. (Standard 8) Prices send signals and provide incentives to buyers
and sellers.
Montana Social Studies Content (Standard 5)
1. (Benchmark 1) Identify and explain basic economic concepts.

2. (Benchmark 3) Understand the social costs and benefits to society of
allocating goods and services through private and public sectors.
3. (Benchmark 4) Understand how different values and beliefs influence
economic decisions in different economic systems.
TIME REQUIRED
1-2 class periods
MATERIALS
Overhead projector
Transparency pen

Market equilibrium
Teacher
Visuals for overhead projector: Copy to transparency.

NVisual-1: Supply
NVisual-2: Demand
NVisual-3: Equilibrium defined
NVisual-4: Shortage
NVisual-5: Surplus
Lesson worksheets: Copy for each student:
2Lesson-I: Equilibrium
2Lesson-II: CD equations
2Lesson-III: CD schedule
PROCEDURE
1. Review the concept, supply. Display NVisual-1: Supply.

a. LQuestion: Why is the supply curve typically upward sloping?
Answer: When the prospects for profits in an industry increase,
firms are likely to increase output. The supply curve shows the
relationship between price and quantity, holding all other fac-
tors constant. When price changes, potential profits also change
(Profit = Total Revenue-Total Cost, Total Revenue = Price x Quan-
tity). The positive relationship between price and quantity sup-
plied is reflected in the upward sloping supply curve.
b. LQuestion: How does a change in price influence the supply
curve and the amount of the commodity produced?
Answer: A change in price can be shown as a movement along
the supply curve which will change the quantity supplied. A
movement from point E to point F on NVisual-1: Supply shows a
change in quantity demanded resulting from a change in price.
c. LQuestion: How will a change in the price of an input affect
the supply curve of a commodity?
Answer: A change in the price of an input will shift the supply
curve. An increase in the price of an input will decrease supply;
a shift to the left. A decrease in the price of an input will increase
supply; a shift to the right.
d. Draw a new supply curve on NVisual-1: Supply to demonstrate
an increase or a decrease in supply on the visual.
LQuestion: What other factors will shift the supply curve?
Answer: A change in technology will increase supply (shift

Market equilibrium
Teacher
right), an increase in taxes or regulations will decrease supply

(left shift), an increase in the number of producers will increase
supply (right shift). Natural and political disruptions can also
shift the supply curve. Hurricane Katrina, for example, destroyed
a number of oil refineries, decreasing the supply of oil and shift-
ing the curve to the left. Demonstrate these shifts on NVisual-1:
Supply.
2. Review the concept, demand. Display NVisual-2: Demand.

a. LQuestion: Why is the demand curve downward sloping?
Answer: As the price of a commodity rises, less will be con-
sumed. This is the result of scarcity. Income is limited and substi-
tutes exist. There is an inverse, or negative, relationship between
the price and quantity demanded.
b. LQuestion: How does a change in price affect the demand
curve and the quantity demanded?
Answer: A change in price can be shown as a movement along
the demand curve changing the quantity demanded.
This is shown on NVisual 2: Demand, as a movement from
point E to point G.
c. LQuestion: How will a change in the price of a related good
affect the demand curve?
Answer: Generally, a change in the price of a complement will
shift the demand curve of the original commodity in the opposite
direction as the price change. If peanut butter and jelly are com-
plements and the price of jelly rises, the demand for peanut but-
ter will decrease and shift to the left. A change in the price of a
substitute will shift the demand curve of the original commodity
in the same direction as the price change. If Coke and Pepsi are
substitutes and the price of Coke increases, the demand for Pepsi
will also increase and shift to the right. Demonstrate a change in
demand by drawing a new demand curve on the visual. A shift
to the right shows an increase in demand, a shift left shows a
decrease in demand.
d. LQuestion: What other factors will shift the demand curve?
Answer: A change in the number of consumers, a change in
tastes and preferences, and a change in expectations can all
cause a shift in the demand curve. Demonstrate these on NVi-
sual-2: Demand.

Market equilibrium
Teacher
3. Display NVisual-3: Equilibrium defined. The intersection of supply

and demand, at point E, is the equilibrium. This could also be shown
by overlaying visuals 1 and 2. At the equilibrium price, PE, the quantity
demanded is equal to the quantity supplied at QE. Typically, unfettered
markets will bring us to the intersection of supply and demand, the
equilibrium. In equilibrium, the quantity that consumers are willing
to consume is exactly equal to what firms are willing to produce at a
given price.
4. Handout 2 Lesson-I: Equilibrium. Give students time to read through

section I of the lesson. The lesson displays the supply and demand
schedules for babysitting and graphs the two curves. It also provides
the mathematical calculation for each curve using linear equations.
Each equation is set such that y = f(x); (y is a function of x). The x,
on the horizontal axis, is known as the independent variable, and
y, the dependent variable, is placed on the vertical axis. The slope
of the line, m, measures the change in y divided by the change in
x. The y-intercept, b, is the point where the line intersects the y, or
the vertical, axis (where x = 0).
y = mx + b
The dependent variable (y) is isolated on the left and the indepen-
dent variable (x) is on the right. In economics, the dependent variable
on the horizontal axis is quantity, Q, and the independent variable on
the vertical axis, is price, P. Note that the coefficient for the slope of
the supply curve, QS, is positive, reflecting the positive relationship
between price and quantity. The result is an upward sloping supply
curve. The coefficient on the slope of the demand curve, QD, is nega-
tive, indicative of the inverse relationship between price and quantity
and the downward sloping demand curve.
Given a set of linear equations for supply and demand, you can
calculate the equilibrium level of price and quantity. Setting QS and
QD equal and solving for price will determine the equilibrium price.
Plug the equilibrium price back into either equation and solve for
Q to calculate the equilibrium quantity. Using the equilibrium price
and solving for Q in both equations is a good check for accuracy.
To be in equilibrium QD = QS.
5. LQuestion: What happens when quantity demanded, QD, is not

equal to quantity supplied, QS?

Market equilibrium
Teacher
This is shown in Section 2 of the handout. Work through section

II of the handout with students. First discuss what happens when
the price is too low and a shortage occurs. This is shown in NVi-
sual-4: Shortage.
a. If the price per unit charged is less than the equilibrium price,
consumers will desire to purchase a greater quantity than the
equilibrium quantity. Using NVisual-4: Shortage show students
that the quantity demanded can be determined by finding the
point where a horizontal line from the $2 per hour price inter-
sects the demand curve; 140 hours in this example. Producers
won’t be willing to provide as much as the equilibrium quantity.
Babysitters will only work to the point where the $2 per hour
wage intersects the supply curve; 40 hours in this example. The
result is a shortage, quantity demanded is greater than quantity
supplied (QD > QS). The shortage is the difference between the
quantity demanded (140 hours) and the quantity supplied (40
hours). The shortage in this example is 100 hours of babysitting.
Parents would like to hire babysitters for 100 more hours than
the babysitters are willing to provide.
b. When there is a shortage, producers, babysitters in this exam-
ple, begin to realize that they can charge a higher price, and
consumers, parents, are willing to pay a higher price to find a
babysitter. This puts upward pressure on price bringing it back to
the equilibrium level of $4 per hour.
c. Another method to determine the shortage quantity, the number
of units desired but not provided in the market, is by using the
supply and demand schedule. Take the difference between the
quantity demanded and the quantity supplied at the price being
charged (140-40 = 100).
d. Finally, the shortage can be determined by using the linear equa-
tions. Plug the price of $2 into each equation and solve for quan-
tity supplied (QS) and quantity demanded (QD). The difference
between them is the shortage.
QS = 20P QD = 200-30P
QS = 20(2) QD = 200-30(2)
QS = 40 QD = 140
QD-QS = 100

Market equilibrium
Teacher
6. Now discuss what happens when price is above the equilibrium

price level. This is shown in NVisual-5: Surplus. If price per unit
is greater than the equilibrium price, consumers won’t want to
purchase as much of the commodity as the equilibrium level. At
the same time, however, producers would like to provide more than
the equilibrium quantity. Again, drawing a horizontal line from the
now $6 price the quantity supplied and quantity demanded can
be determined by its intersection with the respective curves. At $6
per hour the quantity babysitters would like to supply is 120 hours.
Parents are only interested in buying 20 hours of babysitting at the
$6 wage rate. The result is a surplus, quantity supplied is greater than
quantity demanded (QS > QD). The surplus is the difference between
quantity supplied (120 hours) and quantity demanded (20 hours) or
100 hours.
Consumers, parents in this example, are not willing to hire as
many hours of babysitting at the higher price. Teenagers that earn
money by babysitting realize that if they want more hours of work
they must lower their wage. This puts downward pressure on price
bringing it back to the equilibrium level of $4 per hour. Again,
the surplus can be determined by using the supply and demand
schedules, examining the graph, or through mathematical calculation
using the linear equations.
7. Handout 2Lesson-II: CD Equations. Working alone or in pairs, have

the students work through the lesson.
8. Handout 2Lesson-III: CD Schedule for students to complete at

home. Note that both lessons use the same equations. Students can
check their work from 2Lesson-II: CD Equations, with their answers
to 2Lesson-III: CD Schedule.
CLOSURE
Lesson review
1. LQuestion: Why is the supply curve upward sloping?

Answer: The supply curve is generally upward sloping because,
everything else held constant, an increase in price will increase profit.

Market equilibrium
Teacher
Most firms behave to maximize profits.
2. LQuestion: Why is the demand curve downward sloping?

Answer: The Law of demand states that when the price of a
commodity rises, and nothing else changes, the quantity consumed
declines, hence a downward sloping demand curve. This is true
for a number of reasons. First, income is limited. Given income is
fixed, when the price of one commodity rises, not enough money
is available to maintain consumption of the same basket of goods.
Also, substitutes are available. When the price of one item rises, it
becomes relatively more expensive than other goods.
3. LQuestion: What is equilibrium?

Answer: The point markets generally reach such that quantity
demanded equals quantity supplied at the market price.
4. Question: What happens when markets are out of equilibrium?

Answer: Left alone, markets will usually come back to equilibrium
automatically. If price is above the equilibrium price, producers
will provide more than consumers are willing to buy creating a
surplus. To remove the surplus, producers will lower price. As price
declines, consumers will increase quantity demanded. Price will
eventually return to its equilibrium level where quantity demanded
equals quantity supplied. If price is below the equilibrium level,
then producers will not be willing to provide as much as consumers
would like to buy. This shortage will disappear as consumers bid up
the price and producers increase the quantity supplied at higher
prices. This automatic movement toward equilibrium is referred to
as the invisible hand.
ASSESSMENT
Multiple-choice questions
1. LQuestion: Which of the following demonstrates a market

equilibrium?
a. Quantity supplied equals quantity demanded.
b. Quantity supplied is greater than quantity demanded.

Market equilibrium
Teacher
c. Quantity supplied is less than quantity demanded.

d. The shortage is greater than the surplus.
2. LQuestion: The invisible hand is a mechanism that?

a. Ensures government intervention will assist markets to reach
equilibrium.
b. Shifts the supply curve when consumers desires are too great.
c. Prevents commercialization of commodities.
d. Automatically works to bring markets into equilibrium.
3. LQuestion: If markets are allowed to function, what happens when

price is higher than the equilibrium price?
a. There will be surplus putting downward pressure on price.
b. There will be a shortage putting downward pressure on price.
c. There will be a surplus putting upward pressure on price.
d. There will be a shortage putting upward pressure on price.
4. LQuestion: If markets are allowed to function, what happens when

price is lower than the equilibrium?
5. LQuestion: What moves markets toward equilibrium price and

quantity?
a. Government sets price where supply is equal to demand.
b. Nothing. Most markets are not even close to equilibrium.
c. Price signals to producers and consumers help eliminate any
surplus or shortage.
d. Government purchase of market surplus.
Answers:
1. a
2. d
3. a
4. d
5. c

Market equilibrium
Teacher
Discussion/Essay Questions
Answer: Equilibrium is the point markets generally reach such that
quantity demanded equals quantity supplied at the market price.
2. LQuestion: The new hit band, Blueberry Beasties, put out a CD

just in time for Christmas. All available CDs rolled off music store
shelves within hours of its release. There was a shortage of Blueberry
Beasties CDs in music stores. Explain how mechanisms in the market
will resolve the situation over time (assuming consumer demand for
the CD does not shift).
Answer: At the given price in music stores the quantity demanded
was greater than the quantity supplied. Over time producers will
realize the greater demand and be willing to provide more CDs
at a higher price, moving up along the supply curve. As price rises
there will be upward movement along the demand curve reducing
the quantity demanded. Eventually the market will come back into
equilibrium where quantity demanded equals quantity supplied.
Alternatively, if no more CDs were produced we could see the price
changes in other markets such as on e-Bay.
3. LQuestion: Sammy’s Sports Shack bought 500 pairs of top of the

line skis this fall only to learn that people wanted snowboards, not
skis. By January they had sold only 100 pairs of skis. What is Sammy’s
likely to do that will help increase ski sales so that they have enough
space for their spring and summer sports gear that will be coming
into the shop soon?
Answer: Sammy’s price was above the equilibrium price. We
know this because the quantity demanded was less than the quantity
supplied and a surplus resulted. Sammy’s will probably lower price
to move the skis out the door and make more room for the incoming
merchandise.

Market equilibrium
Teacher
NOTES
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Module-9
O ver h ead
visuals
The invisible hand
Market equilibrium
Visual
Visual-1: SUPPLY
relates the price

and quantity of
a good produced.
In the case of
babysitting,
the supply curve
relates the hours
of babysitting
community
teenagers will
provide at various
hourly wages or
prices. Recall
that supply curves
are almost always
upward sloping.
N282
Market equilibrium
Visual
Visual-2: demand
relates how
many hours of
babysitting will
be purchased by
neighboring
parents at each
hourly wage. Recall
that the law of
demand requires
that demand curves
are downward
sloping.
N283
Market equilibrium
Visual
Visual-3: Equilibrium Defined
the demand curve

is downward
sloping (a
negative
relationship).
Where the
supply and
demand curves
intersect is the
equilibrium
point. At this
point, quantity
demanded is
exactly equal to
quantity supplied.
N284
Market equilibrium
Visual
Visual-4: Shortage
At this low wage

parents would
like to hire
many
hours of
babysitting.
less than
Shortage:
WHEN
QUANTITY
SUPPLIED IS
LESS THAN
QUANTITY
DEMANDED.
N285
Market equilibrium
Visual
Visual-5: Surplus
surplus: WHEN QUANTITY SUPPLIED IS greater THAN
QUANTITY DEMANDED.
At this high
wage
everyone
wants to
babysit.
But Parents
are not
willing
to hire as
many hours
of babysitting.
SURPLUS:
WEEKLY SUPPLY and DEMAND FOR BABYSITTING
greater than
N286
Module-9
L es s on
w o r ks heets
The invisible hand
Market equilibrium
Lesson
Lesson–I: Equilibrium
Market equilibrium: The invisible hand
Section-I
Supply.
Do you babysit? Why? Or why not? Earlier class discussion developed some of the reasons
why some people babysit and others do not. The supply curve shows the quantity of a good pro-
duced at each price. In this case, the supply curve for babysitting shows the amount of babysitting
teenagers will provide at each hourly wage. Remember supply curves are almost always upward
sloping.
Demand.
How does a parent decide whether or not to hire a babysitter? Similar to your decision to pur-
chase donuts, a parent decides whether or not to hire a babysitter based on price, preferences, in-
come, and the price of related goods. The demand curve shows how many hours of babysitting will
be purchased by parents at each hourly wage. Remember the Law of demand states that demand
curves are downward sloping.
Equilibrium.
How are quantity supplied and quantity demanded determined at any point in time? We have
seen on the supply and demand graphs—with price per unit on the y-axis and quantity on the
x-axis—that the supply curve is upward sloping (a positive relationship) and the demand curve
is downward sloping (a negative relationship). Where the supply and demand curves intersect is
the equilibrium. At the equilibrium price, the quantity demanded is exactly equal to the quantity
supplied. The supply and demand curves from the schedule below are traced in the graph.
The supply curve is the function: QS = 20P,

where QS is the quantity supplied at each price, P.
The demand curve is the function: QD = 200-30P,

where QD is the quantity demanded at each price, P.
Notice: The functions for the supply and demand curves have the quantity on the left side
of the equation rather than price, as inferred by the graph. Conventionally, demand and supply
curves are graphed with price on the vertical axis and quantity on the horizontal axis, even though
mathematically the quantity is on the left side and price is in the right side.
The schedule shows that the quantity supplied and the quantity demanded are equal at $4
288 2 Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices

Market equilibrium
Lesson
Weekly Supply and Demand for Babysitting
Quantity Price per Quantity
Supplied Hour Demanded
40 2 140
80 4 80
120 6 20
per hour. This is the intersection of supply and demand in the graph. At $4 per hour babysitters
are willing to provide 80 hours of babysitting per week and parents are willing to purchase 80
hours of babysitting per week.
Mathematically this is calculated by setting the quantity supplied equal to the quantity de-
manded:
QS = QD
20P = 200-30P
Solve for P to find the equilibrium price.
50P = 200
P=4
The equilibrium quantity can then be calculated by substituting the equilibrium price of $4 for P
in the equations and solving for quantity supplied, QS, or quantity demanded, QD.
QS = 20(4) = 80
QD = 200-30(4) = 80

Market equilibrium
Lesson
Section-II
How do babysitters know they should charge $4 per hour? How do parents know they should pay
$4 per hour?
A shortage puts upward pressure on price.
Imagine the wage for babysitting is only $2 per hour. We can see from the table and graph
above that fewer hours of babysitting will be supplied. Would you babysit for $2 per hour? At this
low wage, however, parents would like to hire many hours of babysitting.
Mathematically,
QS = 20P, so at a price of $2 QS = 40 hours
QD = 200-30P, then at a price of $2 QD = 140 hours
QD > QS

Market equilibrium
Lesson

Quantity Price per Hour Quantity
Supplied Demanded
40 2 140
80 4 80
120 6 20
The result is a shortage of 100 hours (140 hours demanded less 40 hours supplied). The short-
age will encourage parents to offer a higher price for babysitting. The higher price will encourage
teenagers to babysit more. The higher price will result in upward movement along the supply curve
and more quantity supplied. The higher price will also result in an upward movement along the
demand curve so the quantity demanded declines. Because the higher price increases the quan-
tity supplied and reduces the quantity demanded, the shortage decreases. The price increase will
continue until the shortage is eliminated and quantity supplied equals quantity demanded. This is
where the market is in equilibrium, at a price of $4 per hour and quantity of 80 hours.

Market equilibrium
Lesson

Quantity Price per Hour Quantity
Supplied Demanded
40 2 140
80 4 80
120 6 20
SURPLUS:
WEEKLY SUPPLY and DEMAND FOR BABYSITTING
A surplus puts downward pressure on price.
Imagine the wage for babysitting is $6 per hour. We can see from the table and graph above
that more hours of babysitting will now be produced. At this wage, parents are not willing to hire
as many hours of babysitting.
Mathematically,
QS = 20P, so at $6 per hour QS = 120 hours
QD = 200-30P, then at $6 per hour QD = 20 hours
QD < QS

Market equilibrium
Lesson
A firm’s profit maximizing behavior is mani-

fested in the supply curve. Consumer desires are
manifested in the demand curve. The determi-
nation of price and quantity of the commodity
is determined by the market through the inter-
action of supply and demand. Therefore, the
market transmits information between producers
and consumers such that the quantity consumed
is equal to the quantity produced.
Through this mechanism, firms satisfy con-
sumers. By meeting producer goals, producers
benefit society: They do well by doing good.
The eighteenth century economist and moral
philosopher, Adam Smith, labeled this market
mechanism the invisible hand. No central plan-
ning is necessary to coordinate buyers and sell-
ers. Prices, the cost of production, and consumer
willingness to pay are all signals to firms. Firms
respond by producing those goods and services
where there is a potential profit because of con-
sumers willingness to purchase.
T he result is a surplus of 100 hours (120 hours

supplied less 20 hours demanded). Babysit-
ters begin to realize that to get work they may
need to lower their wages. Parents realize they
can reduce the amount paid and still obtain the
babysitting services. As the price of babysitting
is reduced, the quantity supplied declines and
the quantity demanded increases. Eventually,
the market moves into an equilibrium position
where quantity supplied equals quantity de-
manded. When there is a surplus there will be
downward pressure on price.

Market equilibrium
Lesson
Lesson–II: CD Equations
CD Equations
The following equations are for the supply and demand of CDs in the United States (in millions
of CDs).
QD = -2P + 29 QS = .5P-1
1. LQuestion: Calculate the equilibrium price of CDs.
Set QD = QS and solve for P
2. LQuestion: Calculate the equilibrium quantity of CDs that will be produced and consumed.
Solve for QD and QS, given P = 12
3a. LQuestion: If the price per CD is $14, will more or fewer CDs be produced?
3b. LQuestion: Will there be a shortage or

surplus of CDs?
3c. LQuestion: Over time, what will happen

to price (assuming markets are allowed to
function without intervention)?
4a. LQuestion: If the price per CD is $8, will

more or fewer CDs be produced?
4b. LQuestion: Will there be a shortage or

surplus of CDs?
4c. LQuestion: Over time, what will happen to price (assuming markets are allowed to function
without intervention)?

Market equilibrium
Lesson
Lesson–III: CD Schedule
Supply and demand schedule for CDs
The following equations are for the supply and demand of CDs in the United States.
QD = -2P + 29 QS = .5P-1
Complete the supply and demand schedule by calculating the quantity supplied and the quantity
demanded at the various prices.
Supply and Demand Schedule for CDs Supply and Demand for CDs
Quantity Price per CD Quantity $20

Demanded Supplied
$8 $16
$10 Price per CD
$12
$12
$8
$14
$4
$0
Plot the supply and demand curves on the 0 5 10 15 20 25 30
axes provided Quantity of CDs (millions)
1. LQuestion: What is the equilibrium price and

quantity of CDs?
2a. LQuestion: How many CDs will be produced at $14 per CD?
2b. LQuestion: Will there be a shortage or surplus of CDs?

LQuestion: How many units will the excess supply (surplus) or excess demand (shortage) be?
2c. LQuestion: What will happen to price (assuming markets are allowed to function without
intervention)?
3b. LQuestion: Will there be a shortage or surplus? How many units will the excess supply (surplus)
or excess demand (shortage) be?
intervention)?

Market equilibrium
Lesson
Lesson Assessment
Multiple-choice questions
1. LQuestion: Which of the following demonstrates a market equilibrium?

a. Quantity supplied equals quantity demanded.
b. Quantity supplied is greater than quantity demanded.
c. Quantity supplied is less than quantity demanded.
d. The shortage is greater than the surplus.
2. LQuestion: The invisible hand is a mechanism that?

a. Ensures government intervention will assist markets to reach equilibrium.
b. Shifts the supply curve when consumers desires are too great.
c. Prevents commercialization of commodities.
d. Automatically works to bring markets into equilibrium.
3. LQuestion: If markets are allowed to function, what happens when price is higher than the
equilibrium price?
4. LQuestion: If markets are allowed to function, what happens when price is lower than the
equilibrium?
5. LQuestion: What moves markets toward equilibrium price and quantity?

a. Government sets price where supply is equal to demand.
b. Nothing. Most markets are not even close to equilibrium.
c. Price signals to producers and consumers help eliminate any surplus or shortage.
d. Government purchase of market surplus.

Market equilibrium
Lesson
Lesson Assessment
Discussion/essay questions
2. LQuestion: The new hit band, Blueberry Beasties, put out a CD just in time for Christmas. All
available CDs rolled off music store shelves within hours of its release. There was a shortage of
Blueberry Beasties CDs in music stores. Explain how mechanisms in the market will resolve the
situation over time (assuming consumer demand for the CD does not shift).
3. LQuestion: Sammy’s Sports Shack bought 500 pairs of top of the line skis this fall only to learn
that people wanted snowboards, not skis. By January they had sold only 100 pairs of skis. What
is Sammy’s likely to do that will help increase ski sales so that they have enough space for their
spring and summer sports gear that will be coming into the shop soon?

Market equilibrium
Module The invisible hand
Answer
Lesson–II: Answer Key
CDs equations
The following equations are for the supply and demand of CDs in the United States (in
millions of CDs).
QD = -2P + 29
QS = .5P-1
1. LQuestion: Calculate the equilibrium price of CDs.

Set QD = QS and solve for P
Answer:
-2P + 29 = .5P-1
29 + 1 = .5P + 2P
30 = 2.5P
P = 12
2. LQuestion: Calculate the equilibrium quantity of CDs that will be produced and
consumed.
Solve for QD and QS, given P = 12
Answer:
QD = -2(12) + 29 = 5
QS = .5(12)-1 = 5
Answer: More CDs will be produced at a higher price.

Answer: There will be a surplus because more CDs are produced but fewer will be purchased
by consumers.

Market equilibrium
Answer
Lesson–II: Answer Key
3c.LQuestion: Over time, what will happen to price (assuming markets are allowed to function
Answer: There will be downward pressure on price bringing consumer desires back in line
with the quantity firms are willing to produce.
Answer: Fewer CDs will be produced at a lower price.

Answer: There will be a shortage because consumers desire more CDs but producers are
providing less of them.
4c. LQuestion: Over time, what will happen to price (assuming markets are allowed to function
Answer: There will be upward pressure on price until the quantity demanded is equal to the
quantity supplied.

Market equilibrium
Answer
Lesson–III: Answer Key
Supply and demand schedule for CDs
The following equations are for the supply and demand of CDs in the United States.
QD = -2P + 29
QS = .5P-1
Complete the supply and demand schedule by calculating the quantity supplied and the quantity
demanded at the various prices.
Supply and Demand Schedule for CDs Supply and Demand for CDs
Quantity Price per CD Quantity $20 S

Demanded Supplied
13 $8 3 $16
Price per CD
9 $10 4
$12
5 $12 5
1 $14 6 $8
$4
D
$0
0 5 10 15 20 25 30
Quantity of CDs (millions)
Plot the supply and demand curves on the axes provided.

Market equilibrium
Answer
Lesson–III: Answer Key
1. LQuestion: What is the equilibrium price and quantity of CDs?

Answer: Equilibrium price = $12. Equilibrium quantity = 5
2a.LQuestion: How many CDs will be produced at $14 per CD?

Answer: 6 (million) CDs will be produced at $14
2b. LQuestion: Will there be a shortage or surplus of CDs? How many units will the excess supply
(surplus) or excess demand (shortage) be?
Answer: There will be a surplus of 5 (million) CDs. Producers will provide 6 (million) but
consumers will buy only 1 (million) at $14 per CD.
intervention)?
Answer: There will be downward pressure on price.

Answer: 3 (million) CDs will be produced at $8.
3b. LQuestion: Will there be a shortage or surplus? How many units will the excess supply (surplus)
or excess demand (shortage) be?
Answer: There will be a shortage of 10 ( million) CDs. Only 3 (million) will be produced but
consumers would like to buy 13 (million) at a price of $8.
intervention)?
Answer: There will be upward pressure on price until the quantity demanded equals the
quantity supplied at $12.

Market equilibrium
Teacher
NOTES
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Module-9

P. 288 2Lesson-I: Equilibrium

B abysitting is often a source of income for many teenagers. What

The quantity of a commodity purchased is based largely on price,

What determines how much of a commodity will be consumed and

Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices 265

quantity demanded are equal at $4 per hour. This is the intersection of

Weekly Supply and Demand for

266 Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices

Mathematically the equilibrium can then be calculated by setting the equation

The equilibrium quantity can then be calculated by substituting the

Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices 267

wage, however, parents would like to hire many hours of babysitting.

The shortage will encourage parents to offer a higher price to find

268 Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices

A surplus puts downward pressure on price

Weekly Supply and Demand for

Surplus: Weekly Supply and Demand for Babysitting

Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices 269

QS = 20P, so at $6 per hour QS = 120 hours

Babysitters begin to realize that to find employment they may need

The Invisible Hand

Through this mechanism, firms satisfy consumers. By meeting

270 Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices

National Content Standards in Economics

1. (Standard 2) Effective decision making requires comparing the

Montana Social Studies Content (Standard 5)

1. (Benchmark 1) Identify and explain basic economic concepts.

Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices 271

Visuals for overhead projector: Copy to transparency.

1. Review the concept, supply. Display NVisual-1: Supply.

272 Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices

right), an increase in taxes or regulations will decrease supply

2. Review the concept, demand. Display NVisual-2: Demand.

Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices 273

3. Display NVisual-3: Equilibrium defined. The intersection of supply

4. Handout 2 Lesson-I: Equilibrium. Give students time to read through

5. LQuestion: What happens when quantity demanded, QD, is not

274 Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices

This is shown in Section 2 of the handout. Work through section

Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices 275

6. Now discuss what happens when price is above the equilibrium

7. Handout 2Lesson-II: CD Equations. Working alone or in pairs, have

8. Handout 2Lesson-III: CD Schedule for students to complete at

1. LQuestion: Why is the supply curve upward sloping?

276 Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices

Most firms behave to maximize profits.

2. LQuestion: Why is the demand curve downward sloping?

3. LQuestion: What is equilibrium?

4. Question: What happens when markets are out of equilibrium?

1. LQuestion: Which of the following demonstrates a market

Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices 277

c. Quantity supplied is less than quantity demanded.

2. LQuestion: The invisible hand is a mechanism that?

3. LQuestion: If markets are allowed to function, what happens when

4. LQuestion: If markets are allowed to function, what happens when

5. LQuestion: What moves markets toward equilibrium price and

278 Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices

2. LQuestion: The new hit band, Blueberry Beasties, put out a CD