In a market where monopolistic competition exists, businesses operate in a manner wherein producers sell differentiated products from one another, yet similar. This means that the product is not homogenous. Firms can still market their products by the highlighting the slight differences in their output. The various producers in this type of market are selling their products, in this case handmade music boxes, which act as substitutes. Firms are able to control the prices in some degree within a narrow range of prices.
They enter the market if the profits are attractive wherein they can maximize their profit and are left with excess production capacity. In a market where there is monopolistic competition, there are many firms, which each firm has a small market share and operates independently from each other. (Salvatore, 2007) Enterprise, natural, labor and capital are considered as the factors of production in the economy. Given a firm that operates a business in hand made music boxes, these factors of production are important as to gain profit and be able to be competitive in the market.
In a monopolistic competitive market, it is assumed that all these factors of production are mobile, in which if these are not being used efficiently, they will move instantly to where they can be maximized. (Harvey & Jowsey, 2007) In an enterprise, entrepreneurial skills are needed to manage and direct the other three factors of production to enable a production of goods or services in the market. Operating a hand made music box needs skills from people that have managerial experiences that can lead the firm into a competitive advantage through effective planning and execution in producing the goods needed in the market.
This will help in giving the business a competitive advantage wherein the characteristics of the hand made music box of a certain firm is made with quality than that of other firms in the market. (Case & Fair, 2007) No business can operate without natural or land as part of its factors of production. Land is where the business is being done. It can be a factory, building, agricultural land or office, but this should have a location for it to be established. An access to land is needed in setting up firms. (Case & Fair, 2007) Hand made music box business needs a factory for the assembly of parts and for storing.
Moreover, this business needs a shop for the goods to be displayed so that the goods can be seen by the consumers that will buy the product. Access to land and property can raise the standard of production as well as be more competent in the market. (American Journal of Economics and Sociology, 2002) Businesses manage to exist because of its labor force. Firms do need people who can do hours of work for them. In making hand made music boxes, there can be a composition of various assembly lines. These assembly lines are made up of people that will do specific parts in making the hand made music boxes of the firm.
Skilled workers help the firm in having competitive advantage in the market. In a competitive market, skills of workers are important to produce high quality goods that can be sold to consumers. This will result in a high advantage of a certain firm that employs highly skilled workers over those firms that employ lesser skilled people. (Harvey & Jowsey, 2007) In every business setting, capital should be present. Capital refers to equipments used by firms to produce goods. The workers of a hand made music box business need equipments for the production of the goods. These equipments will help the production be more effective and efficient.
In a competitive market where different firms compete for products being sold to consumers, a firm needs capital that will increase the quality of the product. This will make the firm more advantageous in terms of output and quality in the market. (Harvey & Jowsey, 2007) Given that the situated market is in a monopolistic competition scenario, a firm’s demand curve will intersect the industry’s demand curve at the firm’s equilibrium level of output and price. (Weins, 1999) This explains why the demand curve is relatively elastic and downward sloping, which can be associated to a flat, but not horizontal demand curve.
Firms in this type of market will have less control over price to charge their output. A firm that makes profit in the short-run will break even eventually because of a decrease in demand in the long-run, which in this case will result in a zero economic profit. (Duffy, 1993) Considering the law of supply, monopolistic competitive markets might not produce large quantities as a response to higher prices. The hindrance to the positive-quantity supply relation is the market control and downward sloping demand curve among monopolistic competitive markets.
Monopolistic competitive firms are considered to be price-searchers rather than price-takers because “prices will change by the comparison of marginal revenue with marginal cost in every possible price along with the market demand curve. ” Prices are not placed equal to marginal revenue; furthermore, it is not equal to marginal cost and price. Thus, as a result, firms do not essentially supply more quantities of goods at lower prices. (Harvey & Jowsey, 2007) In the short-run, individual firms behave like a monopoly thus they can raise their prices leaving the consumers options to buy similar goods from other firms.
As for the long-run, there is a free entry condition where firms continue to occur in the market leaving the demand curve to continually shift leftward until the time when each of the firm earns a zero economic profit. Firms earn economic profit or loss in the short run, but eventually, new entrants will be attracted to profits thus would result to losses until these firms earn zero economic profit. The hand made music box firms will compete in the market for the available consumers that will purchase the goods.