Question

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

Short answer

A price ceiling set below the equilibrium price decreases the number of transactions in a market due to a shortage, as suppliers are unwilling to provide the good or service at the lower price and some potential buyers cannot find a seller. Conversely, a price floor set above the equilibrium price also decreases the number of transactions in a market due to a surplus, as some suppliers cannot find buyers willing to pay the higher price. In both cases, market transactions are negatively impacted.

Step-by-step solution

Understanding Supply and Demand Curves

In a free market, the price of a good or service is determined by the forces of supply and demand. The supply curve represents the quantity of a good or service that suppliers are willing and able to sell at different price levels, while the demand curve represents the quantity that consumers are willing and able to buy at different price levels. The point where these two curves intersect represents the equilibrium price and quantity.

Price Ceiling: Definition and Effect on Transactions

A price ceiling is a government-imposed maximum price for a good or service. If a price ceiling is set below the equilibrium price, it causes a shortage in the market, where the quantity demanded exceeds the quantity supplied. As a result, the number of transactions in the market will decrease because suppliers are not willing to provide the good or service at the lower price, and some potential buyers will be unable to find a seller.

Price Floor: Definition and Effect on Transactions

A price floor is a government-imposed minimum price for a good or service. If a price floor is set above the equilibrium price, it induces a surplus in the market, where the quantity supplied exceeds the quantity demanded. In this case, the number of transactions in the market will also decrease, because some suppliers cannot find buyers willing to pay the higher price.

Answering the Question

To summarize, both a price ceiling (if set below the equilibrium price) and a price floor (if set above the equilibrium price) decrease the number of transactions in a market by creating a shortage or a surplus, respectively. The price ceiling causes a shortage, which leads to fewer transactions as suppliers are unwilling to supply the good or service at the lower price and some buyers cannot find sellers. On the other hand, the price floor causes a surplus, leading to fewer transactions as some suppliers cannot find buyers willing to pay the higher price.