Question

4. Why do both price floors and price ceilings reduce the quantity of goods traded in those markets?

Answer 1

1) Both the price ceiling and price floors are distortionary in nature. It prevents the market form achieving equilibrium in the favor of the consumer. It forces the price below the equilibrium price or above the equilibrium price and increases the demand or the supply. But, both price ceiling and price floor don't work in the same way and reduce the quantity of goods traded in the market.

For example, a price floor set on the price of milk sold in the market it will be above the equilibrium price. In that case, the supplier will supply more milk but at a higher price, the demand for the milk will be less. Creating a surplus in the market.

If the price ceiling is introduced in the market of milk it will be below the equilibrium price that means that the seller will not be able to sell at a higher price than the ceiling price. This will create a higher demand and lower the supply. Creating a shortage in the market.