Question

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

Answer 1

Price ceiling is imposed below the equilibrium price and so the quantity demanded would increase at lower prices whereas quantity supplied is decreased at lower prices however as the price is set below the equilibrium price,so the number of transactions will increase in the market.

Price floor is set above the equilibrium price which is imposed to restrict the price at a minimum point and so the producer will charge the minimum price which is more than the equilibrium price.This will reduce the quantity demanded and increase the quantity supplied and as the price is above the equilibrium price it will always decrease the number of transactions in the market.

Both price ceiling and price floor prevents the market from reaching its equilibrium position where supply is equal to demand as both block some transactions that the buyers and sellers would be willing to make which therefore creates deadweight loss.