Chapter 3: Problem 10

Does a price ceiling increase or decrease the number of transactions in a market? Why? What about a price floor?

Short Answer

Expert verified

A price ceiling, when set below the market equilibrium, decreases the number of transactions in a market due to the shortage it creates, as sellers cannot meet the higher quantity demanded at the lower price. Similarly, a price floor, when set above the market equilibrium, decreases the number of transactions as well due to the surplus it generates, with lower quantity demanded at the higher price. Both cases result in fewer successful transactions between buyers and sellers.

Step by step solution

Definition: Price Ceiling

A price ceiling is a maximum price set by a governing body that cannot be exceeded by sellers in a market. This is often implemented to make essential commodities more affordable for consumers.

Impact of Price Ceiling on Market Equilibrium

When a price ceiling is imposed below the initial market equilibrium, there is a shortage created as the quantity demanded at the lower price exceeds the quantity supplied.

Impact of Price Ceiling on Number of Transactions

With the shortage created by a lower price ceiling, the number of transactions in the market tends to decrease. This is because sellers are not able to meet the higher quantity demanded at the lower price ceiling, leading to fewer transactions overall.

Definition: Price Floor

A price floor is a minimum price set by a governing body that must be maintained or exceeded by sellers in a market. Price floors are often implemented to protect producers, such as in the case of minimum wage laws.

Impact of Price Floor on Market Equilibrium

When a price floor is imposed above the initial market equilibrium, a surplus is created as the quantity supplied at the higher price exceeds the quantity demanded.

Impact of Price Floor on Number of Transactions

With the surplus created by a higher price floor, the number of transactions in the market tends to decrease as well. This is because there is a lower quantity demanded at the higher price floor, leading to fewer successful transactions between buyers and sellers. In summary, both price ceilings and price floors, when implemented away from the market equilibrium, tend to decrease the number of transactions in a market. Price ceilings do so by creating a shortage, while price floors create a surplus.

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