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

In short, both price ceilings and price floors generally decrease the number of transactions in a market. A price ceiling creates a shortage by limiting the maximum price, resulting in decreased production and increased demand. On the other hand, a price floor leads to a surplus by setting a minimum price, encouraging higher production but lowering consumer demand.

Step by step solution

Define Price Ceiling and Price Floor

A price ceiling is a government-imposed limit on the maximum price that can be charged for a product or service in a market. A price ceiling is usually set below the equilibrium price to make goods and services more affordable for consumers. A price floor is a government-imposed limit on the minimum price that can be charged for a product or service in a market. A price floor is usually set above the equilibrium price to protect producers' interests, ensuring they receive a minimum revenue for their goods or services.

Analyze Price Ceiling Effects on Number of Transactions

When a price ceiling is imposed, it restricts the maximum price a seller can charge for a good or service. If the price ceiling is set below the equilibrium price, suppliers likely will not be able to cover their costs, resulting in decreased production. On the other hand, at this artificially lower price, the quantity demanded will increase. However, since suppliers are producing less, a shortage occurs. With the shortage, fewer transactions can take place in the market as there are not enough goods or services available for all the consumers who desire them. As a result, a price ceiling generally decreases the number of transactions in a market.

Analyze Price Floor Effects on Number of Transactions

When a price floor is imposed, it restricts the minimum price a seller can charge for a good or service. If the price floor is set above the equilibrium price, producers will be encouraged to produce more goods due to the higher price. However, consumers will be less likely to purchase these goods at the artificially higher price, resulting in a decrease in quantity demanded. This leads to a surplus in the market. With the surplus, fewer transactions can take place in the market as there is a lower demand at the higher price, leaving many goods or services unsold. As a result, a price floor generally decreases the number of transactions in a market.

Conclusion

In conclusion, both price ceilings and price floors usually decrease the number of transactions in a market. Price ceilings create shortages as they limit the maximum price a seller can charge, causing decreased production and increased demand, while price floors result in surpluses by setting a minimum price, encouraging greater production but reducing demand from consumers.

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